A landmark meeting
The RBI’s (Reserve Bank of India) August 2016 meeting was a landmark meeting. It wasn’t important because of the decisions that were taken regarding the monetary policy stance or liquidity management. It was important for two reasons. First, it was Raghuram Rajan’s last meeting as the central bank governor. Second, it could have been the last meeting convened under the aegis of the Reserve Bank of India Board.
It’s quite possible, although not certain yet, that the next monetary policy announcement could come through the proposed MPC (Monetary Policy Committee). In India, monetary policy announcements have been made under the guidance of the governor. In the near future, the committee system will replace the earlier system.
Status quo on the repo rate
The Reserve Bank of India left its benchmark interest rate, the repo rate, unchanged at 6.5% in its policy meeting on August 9, 2016. The repo rate is the “repurchase option rate.” It’s the key monetary policy rate for the RBI. This is the rate at which the RBI lends to commercial banks. The reverse of this rate—the rate at which banks park money with the central bank—is known as the “reverse repo rate.”
A change in the repo rate is used to signal an increase or decrease in rates to commercial banks (IBN) (HDB). Other rates, like the reverse repo rate, and the MSF (marginal standing facility), are fixed against the repo rate. The rate impacts the movement of the rupee—this impacts exporters’ (TTM) revenue. This feeds into India-focused funds (ETGIX) (INDA) as well.
The status quo in the August meeting makes it the second consecutive meeting that the RBI held off a rate cut. The last time the RBI reduced rates was in April 2016 when the repo rate was slashed by 25 basis points.
In the next part, let’s see why the RBI held off a rate cut in August.