Quick Overview of the Unchanged Monetary Policy
The monetary policy committee (MPC) meeting happened from 8th-10th February 2022 of six members headed by the Reserve Bank of India (RBI) governor Shaktikanta Das.
RBI kept repo rate, reverse repo rate and the bank rate, the benchmark rates of policy unchanged 10th time in a row at 4% continuing with the accommodative stance.
Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. Reverse repo rate is the rate the central bank of a country pays its commercial banks to park their excess funds in the central bank. The minimum rate of interest, which a central bank charges (in India’s case – Reserve Bank of India), while lending loans to domestic banks is called bank rate. When a bank suffers fund deficiency, it can borrow money from RBI to continue services.
The RBI has reduced key policy repo rate by 115 bps to 4.0% and reverse repo rates by 155 bps to 3.35% since February 2020. Banks had since then reduced their interest rates (both deposits and lending) significantly. This means banks won’t hike lending and deposit rates and EMIs on loans will remain unchanged.
Marginal Standing Facility (MSF) is a system of the RBI that allows scheduled commercial banks to avail funds overnight. It also retained the MSF rate, and the bank rate remains unchanged at 4.25%.
RBI is likely to wait for some more time as economic recovery is uneven and the Omicron variant has dented sentiment.
The pandemic, geo-political tensions, elevated crude oil prices and persistent supply bottlenecks, are leading to a lot of challenges for the emerging economies. They often lead to macroeconomic and financial shocks.
The RBI undertook a slew of measures to deal with such an exceptional situation. As a consequence, borrowing costs fell to their lowest levels in decades and spreads narrowed across rating cohorts. Record levels of government securities, corporate bonds and debentures were issued. Corporate entities were able to deleverage seamlessly and reduce high-cost debt while improving profitability and retained earnings for future capex. In view of the pandemic and related work from home and social distancing protocols, the MSF and fixed rate reverse repo windows were made operational throughout the day, instead of only at end of the day under normal circumstances.
Moreover, the MPC flagged potential downside risks to economic activity from the highly contagious Omicron variant. Reassuringly, the symptoms have remained relatively mild and the pace of infections is moderating as quickly as it surged.Further, the MPC suggested that banks and other financial entities would be well advised to further strengthen their corporate governance and risk management strategies to build resilience in an increasingly dynamic and uncertain economic environment. They also need to continue the process of capital augmentation and building up of appropriate buffers. In a highly volatile global environment, the RBI would continue to focus on smooth completion of borrowing programmes of the government and market participants. Therefore, these unchanged repo, reverse repo and bank rates in the view of the RBI would provide a way for the economy to move ahead smoothly.