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RBI Monetary Policy Committee Meet- Everything You Need to Know

On Friday, April, 05, the Reserve Bank of India (RBI) governor – Shaktikanta Das led Monetary Policy Committee (MPC) announced to keep the repo rate unchanged at 6.5% at its first meet of FY25. The committee in its meet also reported that India’s GDP growth is expected to be at 7% while the CPI inflation is projected at 4.5%. Now the question here is why is the outcome of this meeting considered so important in the economics of the nation and how does it impact you? Let’s decode this thoroughly:

What is Monetary Policy? Why does it matter?

The Reserve Bank of India (RBI) is India's central banking institution that is responsible for formulating and implementing monetary policy. But what is monetary policy? Monetary policy functions as a comprehensive toolkit utilized by central banks, to regulate the flow of money within the economy and influence the cost of borrowing. Monetary policy is designed to maintain a delicate balance between increasing or decreasing the money supply as necessary. When the economy is sluggish due to a lack of money, central banks inject more funds to stimulate spending and investment. Conversely, to prevent inflation from escalating prices too rapidly, it may reduce the money supply.

Through monetary policy, the central bank manages interest rates, essentially the price of borrowing money, thereby influencing economic activities. Lowering interest rates makes loans more affordable, encouraging more spending and investment. Raising them, however, can cool down an economy that's heating up too fast, thus tempering spending.

One of the primary methods the RBI employs is open market operations, involving the buying and selling of government bonds. Purchasing bonds increases the money supply by putting more money into circulation, while selling them withdraws money from the economy.

Another important tool at its disposal is adjusting reserve requirements for banks, dictating how much money banks must hold in reserve rather than lend out. Reducing these requirements allows banks to lend more, thus boosting the money supply, whereas increasing them has the opposite effect, reducing the money supply.

And then comes the repo rate. The repo rate is the rate of interest that banks pay when borrowing directly from the central bank. This is an important lever used by the RBI to control the economy's money flow. Lowering this rate reduces borrowing costs for banks, enabling them to extend more loans and thus increase the money supply. While increasing the repo rate restricts borrowings as it will lead to banks increasing the interest payable on retail loans which discourages individuals from borrowing more and hence lowering spending.

In conclusion, it can be said that the overarching objective of deciding the Monetary Policy is to foster steady economic growth, maintain low inflation, and reduce unemployment. Since achieving this balance is complex, as excessive manipulation in either direction could either high inflation or lead to recession, the RBI conducts thorough survey and understands the demand of the economy and proposes a plan that benefits the economy and its people, together.

Reports from the first FY25 MPC meet

After a detailed assessment of the evolving microeconomic and financial development facility, the monetary policy committee (MPC) meetings held on the 3rd, 4th and 5th of April finalised that the MSF (Marginal Standing Facility) rate and the Bank rate remains stable at 6.75%. The Monetary Policy Committee also kept the repo rate unchanged at 6.50% for the 7^th consecutive time. The repo rate was last changed on Feb 2023, when it was hiked from 6.25% to 6.50%.

How will the repo rate trigger savings and expenses of Indian households?

The repo rate is a critical tool used by the Reserve Bank of India (RBI) to influence the country's economy. When the RBI changes the repo rate, it directly affects the interest rates that banks charge for loans and offer on savings, which in turn impacts how households save and spend.

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In a scenario where the RBI decides to keep the repo rate unchanged, like in the recent Monetary Policy Committee (MPC) meet, the immediate impact on Indian households can be summarized as follows:

1. Stable Loan Costs: Since the repo rate influences the interest rates on loans, keeping it unchanged means that the interest rates on home loans, car loans, and other types of loans are likely to remain stable. For households with existing loans or those planning to take new loans, especially those with floating interest rates, their EMIs will not increase. This stability gives them financial predictability and confidence in managing their budgets without worrying about sudden increases in loan costs.

2. Unchanged Savings Returns: Similarly, the interest rates on savings accounts and fixed deposits are expected to stay constant when the repo rate remains unchanged. For individuals planning to save, this means that they won't see an increase in the returns on their deposits. While this maintains the status quo, it may not necessarily boost savings if households were hoping for higher interest earnings from their bank deposits.

The underlying aim of the RBI in maintaining the repo rate, especially in times of uncertain economic growth and inflation, is to balance the need for encouraging spending and investment while also keeping borrowing costs manageable for businesses and households. By keeping the rate steady, the RBI signals its intention to support economic stability without imposing additional financial burdens on borrowers or savers.

However, while stable interest rates can provide short-term financial stability for households, the decision to keep the repo rate unchanged also reflects a cautious approach by the RBI towards stimulating economic growth. This caution could indirectly affect households by limiting employment opportunities and income growth if the economy doesn't expand as needed. In summary, the unchanged repo rate seeks to maintain a balance between encouraging spending and managing savings, without significantly disrupting household financial planning.