Group 5

Monetary policy is the macroeconomic policy

laid down by the RBI

Management of money supply and interest rate

and is the demand side economic policy

Repo Rate and GDP of a country are inversely

related

Repo Rate and inflation are inversely related

Repo Rate and foreign exchange rate also share

an inverse relationship

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 Liquidity • Liquidity Adjustment Facility (LAF) is the
principle instrument of the Reserve Bank of India
for modulating liquidity and transmitting interest
Adjustment rate signals
• LAF is used to help banks in adjusting the day-to-
Facility day mismatches in liquidity.

Repo • Repo rate is the rate at which the central bank of

a country lends money to commercial banks in
the event of any shortfall of funds
(Repurchase) • The banks borrow funds from RBI by selling
government securities with a legal agreement to
Rate repurchase the securities traded on a given date
at a predetermined price

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Reverse Repo rate is the rate at which the central bank of a country borrows
money from commercial banks within the country

It is a monetary policy instrument used to control the money supply in the country

An increase in reverse repo rate will encourage commercial banks to invest their
funds with the RBI as they will get more incentives, thereby decreasing the supply
of money in the market

Lowering the reverse repo rate will discourage banks from investing funds into
RBI, thus increasing the liquidity

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 Overnight Repo Rate
• The overnight repo rate is
available for the commercial
banks to adjust to their daily
liquidity needs. It is available
only for a day
Term Repo Rate
• The term repo has different
durations such as 7 days, 14 days
and 28 days
• Term repo tends to pay a
significantly higher rate of
interest as their maturity is
greater than a day
• The collateral risk is higher for
term repo than overnight repo as
the value of the assets used as
collateral
• , Term repo is available only
when RBI announces it through a
term repo auction, and it is
generally available twice in a
week
• . An auction sets the interest rate
under the term repo with the cut-
off rate above the repo rate.
Open Repo Rate
• Open Repo rate is a repurchase
transaction that is agreed upon
without fixing the maturity date
• The distinguishing element of the
term repo is that it can be
terminated on any business day
by either party in the future,
provided they give notice within
an agreed period of time
• Until an open repo is terminated,
it automatically runs from one
day to the next, offering the
convenience of not having to
negotiate and settle daily roll-
overs
• Interest accrues daily but is not
compounded
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 • Banks find it more difficult to avail loans from the RBI when the repo rate increases
• As a result, banks tend to increase their lending rates which makes it more difficult
for industries and common man to borrow money from banks
Increased repo rate
• Money supply decreases and consumption, expansion and production also reduces
• increased repo rate hinders GDP growth

• With a decrease in repo rates, the short-term loans for banks become comparatively
cheaper
• This reduces the banks’ lending rates
Reduced repo rate • Consumption increases as people are left with more money and this has a positive
effect on GDP growth
• the industries are attracted to take loans and make investments which results into
increase in aggregate demand and hence the GDP increases

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Why the Staggered and incomplete monetary
continuous transmission
decrease in
repo rate in Economic Slowdown
2019 has not yet
resulted in the
Agrarian distress and dismal income
increased GDP growth
growth?
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 Inflation and interest rates are often linked and
frequently referenced in macroeconomics
 Inflation refers to the rate at which prices for
goods and services rise
 In India, the interest rate, or the amount charged
by a lender to a borrower, is based on the Repo
Rate that is determined by the Reserve Bank of
India
 This tool enables the RBI to expand or contract
the money supply as needed to achieve target
employment rates, stable prices, and stable
economic growth
 By setting the target for the Repo Rate, the RBI
has at its disposal a powerful tool that it uses to
influence the rate of inflation

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 Over the last six months i.e., March-August 2019
consumer price index (CPI) inflation trailed
below the target of 4.0 per cent averaging 3.1 per
cent over this period
 Its key driver was food prices which emerged out
of deflation in March 2019 and gradually firmed
over the ensuing months in the usual summer
season upturn
 In contrast, prices of fuel and light items
remained soft and slumped into deflation during
July-August 2019
 Excluding food and fuel, inflation ebbed by
around 100 basis points between March- June
2019 and reached a 23-month low in June 2019,
before registering some uptick during July-
August

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  There is an inverse correlation between
interest rates and the rate of inflation
 In India, the Apex Bank is responsible
for implementing the country's
monetary policy
KEY  In general, when interest rates are low,
TAKEAWAYS the economy grows and inflation
increases
 Conversely, when interest rates are
high, the economy slows and inflation
decreases

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 When repo rate
increases, the
money supply in
This leads to a As a result, import
the economy falls
decrease in increases and
and thus the
exchange rate export decreases
demand for
domestic currency
rises

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 RBI's repo rate

Government of India three-

months Treasury Bill yield
published by the Financial
Benchmarks India Private Ltd

Government of India six-months

Treasury Bill yield published by
the FBIL

Any other benchmark market

interest rate published by the
FBIL

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The way out of this slowdown could be a
revival in consumer sentiment, especially
in terms of income expectation. This
should be done by addressing rural
demand

The government should loosen its purse

strings and do a massive fiscal front-
loading in the economy,” says Gita
Gopinath, chief economist, IMF

An increase in infrastructure spending

could create jobs in the rural sector,
leading to a generation of demand

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Thank you

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