HYDERABAD: The RBI’s official policy rate has touched a 58-year-low, shows a TNIE analysis.
In an out-of-turn meeting in May, the central bank’s Monetary Policy Committee (MPC) slashed rates by 40 basis points (bps) taking the repo rate to four per cent.
If the MPC, which may convene this month, decides to cut rates further, policy rates will touch levels last seen in 1957 when RBI’s official rate stood at 3.5 per cent.
The MPC is mandated to meet once every two months and its next meeting is scheduled for August.
But given the emergency MPC meeting held on May 20-22, the next bi-monthly meeting must be scheduled in a fortnight depending on the availability of MPC members.
Lower rates encourage consumers to borrow, spur spending, revive bank credit growth—all of which will goose the economy.
Repo was designated as the key policy rate only in April, 2001. Prior to that, the bank rate (now at 4.5 per cent) acted as RBI’s official rate, a position it had held since January, 1946.
While bank and repo rate are separate policy tools, a comparison drawn only in the context of the official policy rate shows that the central bank’s policy rate of 4 per cent was last seen 58 years ago ie., in December, 1962.
Though both bank and repo are rates at which RBI lends money to commercial banks, the former involves no collateral, while the latter takes securities, bonds as collateral.
Bank rate is usually higher and the duration lasts more than a month, while repo is an overnight rate. Importantly, bank rate influences interest rates of banks that in turn effects end consumers, whereas repo rate controls inflation, influencing liquidity flow in the system.
While there’s no official word, several analysts including MPC’s external member Chetan Ghate believe the reverse repo rate (rate at which banks park funds with RBI; currently 3.35 per cent) is now the effective policy rate.
If so, policy rates have touched 63-year-low and are inching closer to 1946 levels when bank rate stood at 3 per cent. Interestingly, reverse repo is changed by RBI unilaterally without going through MPC, which is what RBI did in April cutting rates and prompting banks to lend.
According to a recent SBI Ecowrap report, RBI has adequate scope to cut repo rate by at least 100 bps from the current level to limit the cost of government borrowings, while others cite falling wholesale inflation prices opening up room for further rate cuts.
The government has refrained from releasing retail inflation data for the past two months and it’ll be interesting to see how the MPC will base its decision given that retail inflation is among the key deciding factors.