Context
The Reserve Bank of India (RBI) increased the repo rate by 25 basis points to 5.50% to control rising inflation. It also changed its monetary policy stance from ‘neutral’ to ‘calibrated tightening’. RBI revised its GDP growth forecast to 7.1% and inflation forecast to 5.2%.
Explanation
- Monetary policy refers to RBI’s measures to influence interest rates and money availability in the economy to control inflation while supporting economic growth.
- Repo rate is the interest rate at which RBI lends short-term money to commercial banks against government securities.
- Why increase repo rate? Rising inflation, expensive crude oil and a weakening rupee have increased pressure on prices.
- How does it work? Higher repo rates make loans costlier, reducing borrowing and spending, thereby helping control inflation.
- Monetary policy stance indicates RBI’s broad approach towards future interest-rate changes.
- Neutral stance means RBI may increase or decrease interest rates depending on economic conditions.
- Calibrated tightening means RBI prefers gradually increasing interest rates to control inflation without excessively slowing growth.
- The six-member Monetary Policy Committee (MPC) decides the repo rate. India’s CPI inflation target is 4%, with a tolerance range of 2%–6%.
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RBI Monetary Policy: Repo Rate and Inflation Control