The Monetary Policy Committee decides on Repo Rate. Every two months, the Monetary Policy Committee organizes a meeting in which the Major topics, including Repo Rate and Reserve Repo Rate, are discussed.
The Monetary Policy Committee is a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, for maintaining price stability while keeping the growth objective.
The amended Reserve Bank of India (RBI) act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once every year.
The Monetary Policy Committee determines the policy interest rate (repo rate) required to achieve the inflation target, which is 4 percent. Inflation should not be less than four and neither more than 6 percent.
As we know, Commercial Banks are the primary unit of the Indian banking system. Like other businesses, commercial banks also aim to earn a profit, and they provide a variety of services to the people. Commercial Bank is an institution that performs the function of granting loans and making an investment to earn profit.
When someone needs loans, they usually go to commercial banks (ex SBI, HDFC Bank, Axis Bank, etc.). But have you ever thought that if a Bank needs money, then from where it gets the loans or whether the bank gets the loans or not?
Well, Commercial Banks can also take loans. When Commercial Banks require money, they take loans from the Reserve Bank of India. The Reserve Bank of India lends the money to the Commercial Banks.
We already know that when we take a loan from a commercial bank, it charges interest on that loan. Likewise, when Commercial Banks take loans from the Reserve Bank of India, the RBI also charges an Interest to Commercial Banks.
When Commercial Banks have a surplus with them, they hold this surplus with the Reserve Bank of India. In return Reserve Bank of India has to give an interest known as Reverse Repo Rate.
When the Reserve Bank of India raises Repo Rate, the loan gets expensive for the Commercial Banks. In simple words, loans become expensive for Commercial Banks. It means that whenever Commercial Banks take loans from the Reserve Bank of India, they have to pay a higher Repo Rate.
Once the Commercial Bank increases its Interest Rate, the loan will become expensive for the general public. It means that when the general public takes out a loan from commercial banks, they have to pay higher interest.
The subsequent result of this will be that the flow of liquidity will get down, which discourages the investors and general public because of which the Inflation also gets down and reduced.
Likewise, when the reverse bank of India reduces the repo rate when Commercial Bank takes out a loan, the loan gets Cheaper, and they have to pay a lower amount.
When the Interest Rate drops, this will encourage the investors and the general public to take more loans. This will lead to an increase in the flow of liquidity. And hence will increase Inflation.
There is an Inverse Relation between the Growth of the country and Inflation. Here the country’s growth means the GDP(Gross Domestic Product). When Inflation increases, the growth of; the Gross Domestic Product will also increase. Likewise, when Inflation decreases or goes up, the Gross Domestic Product (GDP) also decreases.
If Inflation decreases, this decreases the flow of liquidity in the market because of which the demand and supply of the goods and services also lower in the market; hence, a decrease in Inflation leads to a reduction in the growth of the country, i.e., the Gross Domestic Product.
When Inflation increases, this will decrease and cut out the flow of liquidity in the market. As a result, the Supply and Demand of goods and services will also decrease, increasing the country’s growth.
There is a significant difference between the statement given by the Monetary Policy as Stance was that the focus of the May’s Meeting was on the accommodation, which will occur afterwards on the withdrawal.
This month, i.e., in Yesterday’s meeting, the statement says that the stance will focus on withdrawing accommodation. This means that now the priority is focused on Inflation rather than Growth.