1: Understanding Repo and Reverse Repo Rates

- Repo rate refers to the rate at which the central bank of India, the Reserve Bank of India (RBI), lends money to commercial banks in a situation of fund shortfall.

    - Additionally, the RBI purchases the security.

- Reverse repo rate signifies the interest rate paid by the RBI to commercial banks when these banks park their added “liquidity” or money with the RBI.

- Therefore, the reverse repo rate is the exact opposite of the repo rate.

2: Current Monetary Policy Stance of the RBI

- As of the recent Monetary Policy Committee (MPC) meeting, the central bank decided to keep interest rates unchanged with the repo rate standing at 6.5%.

- The accommodative policy, implying expansion of money supply for enhancing economic growth is also being gradually withdrawn.

- This process of accommodating withdrawal is aimed at tightening the money supply within the financial system thereby curbing inflation.

3: Implications of the Recent MPC Meeting

- In this recent meeting, the RBI remained fixed on the GDP growth forecast at 7% for FY25 as compared to the 7.6% growth projected by the National Statistical Office (NSO).

- The RBI will continue to align inflation with the 4% target within a band of +/- 2% while also supporting the growth objective.

4: Why were the Interest Rates Unchanged?

- Food inflation, which influences headline inflation despite overall moderation, and the uncertainties with food prices pose unique challenges.

- Factors such as the festive season catalysing market liquidity, uncertainty surrounding crude oil prices, and resilient economic activity also influenced this decision.

- Previous repo rate hikes influence the economy and managing inflation risks also contributed to retaining the rates.

5: Inflation Targeting in India

- Inflation targeting is a monetary policy framework adopted by the RBI in 2016 that targets a specific inflation rate using monetary policy institutions.

- The primary objective of RBI is to maintain a 4% inflation target with a +/- 2% comfort zone.

- However, this framework faces limitations with structural constraints, exchange rate volatility, socio-economic impacts, and issues with data availability.

By emphasising both the economic growth and inflation targets, the RBI maintains a fine balance between monetary supply and interest rates. As such, changes in the repo rate influence the overall financial health and economic resilience of the country. The current stance reflects the confidence in the resilience of India's economy amidst broad global uncertainties.