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RBI to Decide on Rates Today, Here’s How it Impacts You

A rate cut means a reduction in the rate of interest at which commercial banks borrow money from the RBI. If there is a slump in rates, the banks can then go on to furnish loans at lower interest rates to individuals and the industry.

Rounak Kumar Gunjan | News18.com

Updated:December 6, 2017, 8:49 AM IST
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RBI to Decide on Rates Today, Here’s How it Impacts You
File photo of Reserve Bank of India.
New Delhi: The Reserve Bank of India (RBI) suddenly starts hitting the headlines when the monetary policy committee (MPC) meeting is due. Sector experts and economists start making assumptions and predictions whether there might be a change in the rate or status quo will be maintained. News18 explains how the rates are changed and why you should care about them.

The rate in contention is the repurchase rate or the repo rate. This is the rate at which the Central Bank lends money to commercial banks, such as the ICICI Bank, the HDFC Bank or the good old SBI among others, usually in exchange for government securities.

Therefore, a rate cut means a reduction in the rate of interest at which commercial banks borrow money from the RBI. If there is a slump in rates, the banks can then go on to furnish loans at lower interest rates to individuals and the industry. Similarly, say the apex bank raises its repo rates, banks then, in order to maintain their profit margins, have to raise the rate of loan disbursal.

Why should you be concerned about these rates?

A rate cut can increase liquidity in the economy and hence spike up the cost of goods and services.

A slashed repo rate corresponds to businesses borrowing at cheaper rates from the banks. Similarly, individuals borrowing from the formal sector also gain from cheaper credit if rate cuts by the RBI get passed on to them through consumer loans.

Who decides if rates should be changed?

A six-member monetary policy committee, with three top RBI officials (including the governor and deputy governor) and three government nominees who meet once in every two months, are responsible for deciding the repo rate.

The members vote on proposals and the majority wins, while for now, Urjit Patel, the RBI governor, who is also the chairperson of the committee, gets the deciding vote in case of a tie.

However, until last year, the RBI governor would decide whether to go for a rate cut in consultation with a technical advisory committee.

What are the major factors that influence the committee’s decision on the rate?

The MPC of RBI forecasts the state of the economy and inflation levels for nine to twelve months in advance while deciding on whether or not to change interest rates. In case there is an inflationary trend that the RBI forecasts, then it lowers it rates to counterfeit the effect. If the forecasts say that liquidity, that is, amount of money, in the economy is too high then the RBI raises its rates to curb liquidity. Because the more the money, chances are that inflation might set in.

Pointers such as inflation levels, capital investment in the country, along with certain global factors are the primary determinant of change in repo rates.

The American central bank is planning to gradually sell bonds worth $4 trillion it acquired to revive the economy during the 2008 recession, which would drive up prices and interest rates especially in developing economies like India.
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