RBI takes decisions on Reverse Repo outside of MPC!

RBI Governor addressed the media today and took several steps.  One surprising decision was:

Liquidity Adjustment Facility: Fixed Rate Reverse Repo Rate

13. As I have mentioned earlier, the surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI. On April 15, the amount absorbed under reverse repo operations was ₹6.9 lakh crore. In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.0 per cent to 3.75 per cent with immediate effect. The policy repo rate remains unchanged at 4.40 per cent, and the marginal standing facility rate and the Bank Rate remain unchanged at 4.65 per cent.

In an earlier article, I had written how quite a few interest rate policies are being taken outside of MPC. So far these policies were like Operation Twist, Long Term Repo Operations and so on.

However, the latest decision is Reverse Repo which is seen as a policy rate which should be a call of MPC.

Not really, RBI’s Act 1934 Section 2 (cccci) specifies: “Policy Rate” means the rate for repo-transactions.  Further, Section 45(ZB) 3 of RBI Act says The Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target.

So there you go. The MPC looked like a major reform at one time but does not look anymore with most decisions being taken outside of MPC.

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