RBI Monetary Policy: Why it matters to you

The spotlight shifts to Mint Street as the Reserve Bank of India (RBI) gears to deliver its monetary policy on Friday, April 8. Even though experts believe the central bank may maintain a status quo on the key lending rates, they say reverse repo could see a 15-25 basis points hike. Don't worry, this is a good news!

Let's get the rates sorted! - What is reverse repo?

The repo rate is the rate at which a central bank lends money to banks. Currently, the repo rate stands at 4 percent. Reverse repo is just the opposite. A reverse repo is a rate at which RBI takes money from a bank. It's the interest rate that a bank earns when it parks its surplus cash with the RBI. The reverse repo rate currently stood at 3.35%. 

Why would the RBI hike reverse repo rates?

Large idle liquidity/cash which leads to inflation is the key reason why the central bank tinkers with the reverse repo. At the start of the pandemic, the RBI cut the reverse repo to ensure there was enough liquidity in the system and banks and businesses did not feel the strain. That equation has changed with the pandemic threat receding. The central bank wants to make sure that liquidity is adequate but not excessive to spark inflation. 

When was the last time repo rates were hiked?

The last time RBI increased the reverse repo rate was in August 2018, from 6 percent to 6.25 percent.

So how does a reverse repo hike affect me?

Just like our loan rates are dependent on the repo rate, the interest rates on our savings with banks depend on the reverse repo rate. A higher reverse repo rate will be translated into higher interest rates on our saving accounts and fixed/term deposits.