RBI keeps repo rate on hold as food prices remain high

Monetary Policy Committee (MPC)

• RBI through its monetary policy maintains price stability while keeping in mind the objective of growth. 

• Under Section 45-ZA of the RBI Act, 1934, the Central Government shall, in consultation with the Reserve Bank of India (RBI), determine the inflation target in terms of a consumer price index (CPI), once in every five years.

• Under Section 45ZB, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC) to determine the policy interest rate (repo rate) required to achieve the inflation target. 

• The first such MPC was constituted on September 29, 2016.

• While the central government decides the 

• The MPC shall consist of; 

• The RBI Governor as its ex officio chairperson

• The Deputy Governor in charge of monetary policy 

• An officer of the Bank to be nominated by the Central Board

• Three persons to be appointed by the central government. 

• The last category of appointments must be from persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy.

• The MPC was established based on the recommendation of the Urjit Patel Committee.  This committee recommended CPI (Consumer Price Index) over WPI (Wholesale Price Index) as a measure for inflation targeting.

Repo Rate

• Repo Rate is the interest rate at which the RBI provides overnight (short term) loans to banks against the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF).

• Repo is short form of "Repurchase Agreement". When banks borrow from RBI at repo rate, banks keep Government securities with RBI and get cash in return, with a promise that they will return this cash to RBI and RBI will return the government securities to banks.

• Repo Rate is also called the “Policy Rate”.

[Reverse Repo Rate: The interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF]

[Liquidity Adjustment Facility (LAF): The LAF refers to the RBI’s operations through which it injects/absorbs liquidity into/from the banking system. It consists of repo/reverse repos, Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF)]