Differing Views Over The Repo Rate Cuts

The MPC (Monetary Policy Committee) meeting which is held 4 times a year to decide the benchmark interest rates of India published its minutes of meeting of the meeting on April 04, 2019. The repo rate was cut by 25 basis points to 6. The governor of Reserve Bank of India (RBI) Mr. Shaktikanta Das and deputy governor Vipul Archarya had differing views of the repo rate cuts. The governor spoke about decelerating growth, need for greater investment in the economy. It is necessary to address the challenges to ensure sustained growth in the economy. The deputy governor said, we need to wait for upcoming data to be published and that the economy is giving mixed signals.

Repo rate is the interest rate at which the RBI lends money to the banks to ensure appropriate liquidity in the market. MPC is a committee of 6 members (3 members from RBI and 3 nominated by government) that decides on the repo rate 4 times a year. They consider factors like economic growth, investment demand, inflation, liquidity. Since the economic growth is slow, the governor advocated a rate cut and it was cut by a 4-2 vote in MPC meeting. One of the two members who did not vote for the rate cut were the deputy governor, who insisted that the decision could be taken after data is published on “several important uncertainities.”

Repo rate is one of the levers RBI uses to modulate the economy. If it cuts the repo rate, banks get capital at cheaper rate and the hence the low cost capital is passed on to the public. Low cost capital means more spending in growth infusing areas like infrastructure, capital expenditure, etc. The other lever RBI uses injection of liquidity into the system. When the RBI wants to increase liquidity, it buys bonds (treasury or government) and wants to decrease liquidity, it sells bonds in the market.