Source: TH
Why in News?
The Reserve Bank of India (RBI), in its February monetary policy, decided to keep the policy repo rate unchanged at 5.25% and retained a neutral policy stance, signalling a likely pause in rate action.
Key Decisions
- Repo Rate:
- Maintained at 5.25%
- Policy Stance:
- Neutral
- MPC Decision:
- Status quo adopted amid stable macroeconomic conditions
What Does “Neutral Stance” Indicate?
- Global and domestic developments
- RBI is not pre-committed to either rate hikes or cuts
- Future actions will depend on:
- Inflation trajectory
- Growth outlook
What is Repo Rate?
The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends short-term funds to commercial banks against government securities.
- Tool used by RBI to control inflation and liquidity
- Higher repo rate → borrowing becomes costlier
- Lower repo rate → borrowing becomes cheaper
What is Reverse Repo Rate?
The reverse repo rate is the interest rate at which RBI borrows money from commercial banks.
- Used to absorb excess liquidity from the banking system
- Banks park surplus funds with RBI to earn safe returns
- Usually lower than repo rate
Repo vs Reverse Repo
| Aspect | Repo Rate | Reverse Repo Rate |
|---|---|---|
| RBI’s role | Lender | Borrower |
| Banks’ role | Borrowers | Lenders |
| Objective | Inject liquidity | Absorb liquidity |
| Effect on money supply | Increases | Decreases |
