The RBI continues to combat inflation with a slower rate increase of 35 basis points
As expected by 32 of the 39 analysts surveyed by Bloomberg, the Monetary Policy Committee of the Reserve Bank of India voted 5-1 to increase the benchmark repurchase rate by 35 basis points to 6.25%.
According to Governor Shaktikanta Das, the rate panel resolved to continue concentrating on the withdrawal of accommodations. The central bank of India reaffirmed its commitment to fighting inflation while reducing the rate at which borrowing prices are rising as an indication that the rate is about to peak.
As expected by 32 of the 39 analysts surveyed by sources, the Monetary Policy Committee of the Reserve Bank of India voted 5-1 to increase the benchmark repurchase rate by 35 basis points to 6.25%. According to Governor Shaktikanta Das, the rate panel resolved to continue concentrating on the withdrawal of accommodations.
In a webcast announcing the decision, Das stated that “economic growth in India continues resilient and inflation is likely to decline.” However, the fight against inflation is far from over.
Stocks increased by 0.1%, and the rupee increased to 82.5663 by 0.1%. Following the decision, bond yields increased by four basis points to 7.29%. Das asked market observers to categorise the action as hawkish or dovish.
The action is being taken as consumer prices have continued to rise for more than three consecutive quarters, above the central bank’s 2%–6% objective. Although inflation dropped below the 7% mark in October for the first time in three months, a central bank’s principal responsibility is to maintain price stability, so this development is hardly encouraging.
In a letter to the government this month, the RBI described how external circumstances contributed to its failure. The roadmap to bring price increases within aim was laid forth in the same note.
The central bank decreased the growth outlook from 7% to 6.8% while maintaining its 6.7% inflation forecast for the current fiscal year ending in March.
As proof of a “very robust” growth impulse, he added, “I would want to stress that growth continues to exhibit resilience.” He cited the most recent growth forecast as support. “The fight against inflation remains in focus. There won’t be a break in that.
Rahul Bajoria, an economist at Barclays Plc, stated that “RBI’s decision was in line with market expectations.” Although not enough to switch gears to neutral, the reduction in the size of hikes implies a greater level of comfort with the inflation outlook.
Meaning Of Repo
Repurchase option or repurchase agreement is referred to as “repo.” It is a type of short-term borrowing that enables banks and financial institutions to borrow money from other banks and financial institutions in exchange for government securities with the understanding that they will purchase those securities back at a predetermined price and after a specified time period (which is higher than the initial sell price).
A secured method for banks to raise short-term capital is through repurchase agreements. These loans often have terms that range from one day to two weeks.
In this method, the lender enters into a reverse repurchase agreement, often known as a reverse repo, while the borrower enters into a repurchase agreement or repo. The RBI is the name of the central bank in India (which is the central bank in the country) provides commercial banks with loans at a rate of interest known as the repo rate. These loans are approved in return for securities in order to aid the banks in meeting their financial objectives.
In contrast, RBI also has policies in place that allow banks to park their surplus cash and receive interest payments from RBI based on the reverse repo rate.
When the RBI borrows money from commercial banks, the same interest rate is charged. To keep the nation’s economy stable, RBI uses repo and reverse repo. RBI helps commercial banks borrow money from the bank when the economy needs a boost by injecting funds into the system. Banks raise the funds they require to expand their lending capacity using repo.