uploads/2016/10/Indias-Repo-Rate-1.jpg

India’s Monetary Policy Committee Cuts the Repo Rate by 25 Basis Points

By

Updated

An important meeting

The October 2016 meeting of the RBI (Reserve Bank of India), which concluded on October 4, was an important one. It was the first monetary policy announcement that came via the MPC (Monetary Policy Committee).

In India, monetary policy announcements have traditionally been made under the guidance of the RBI Governor, but the October meeting heralded the Monetary Policy Committee system. The August meeting, chaired by former RBI Governor Raghuram Rajan, was the last meeting of the earlier system.

Article continues below advertisement

Repo rate cut

The Monetary Policy Committee reduced the country’s key rate—the repo rate—by 25 basis points on October 4, 2016. The rate has fallen to 6.25%.

The repo rate stands for repurchase option rate and is the key monetary policy rate for the RBI, or the rate at which the RBI lends to commercial banks. The reverse of this rate—that is 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, which impacts the revenue of exporters (TTM) and feeds into India-focused funds (ETGIX) (INDA) as well.

The October meeting marked the second rate cut in 2016, with cuts for the year equaling 50 basis points.

In this series, we’ll look in detail at the reasoning behind the rate cut and how the RBI views the path of inflation and the Indian economy going forward.

Advertisement

More From Market Realist