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RBI Hikes Repo Rate By 40 bps


Interest rates in the banking system are set to go up after the Reserve Bank of India (RBI) jacked up the Repo rate, the main policy rate, by 40 basis points to 4.40 per cent and the cash reserve ratio (CRR) by 50 basis points to 4.50 per cent to suck out liquidity and bring down the elevated inflation.

  • However, the central bank retained the accommodative monetary policy in an unscheduled meeting of the Monetary Policy Committee (MPC).


GS III- Indian Economy

Dimensions of the Article:

  1. Instruments of Monetary Policy
  2. What will be the impact?
  3. What does the Repo rate hike mean?
  4. What will be the impact of the CRR hike?

Instruments of Monetary Policy

There are several direct and indirect instruments that are used for implementing monetary policy.

  1. Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
  2. Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
  3. Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
  4. Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
  5. Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
  6. Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
  7. Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
  8. Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
  9. Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
  10. Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.

What will be the impact?

  • Equated monthly instalments (EMIs) on home, vehicle and other personal and corporate loans are likely to go up.
  • Deposit rates are also set to rise after the Repo rate hike that came after nearly four years.
  • By hiking the Repo rate and CRR, the RBI is aiming to keep inflation – which is already close to 7 per cent — at its desired level, and control and monitor money flow into the banking system at a time when the global economy is facing turbulent times.

What does the Repo rate hike mean?

  • The hike in Repo rate – the key policy rate of RBI or the rate at which it lends to banks – means the cost of funds for banks will go up.
  • This will prompt banks and NBFCs to raise the lending and deposit rates in the coming days.
  • However, analysts say that consumption and demand can be impacted by the Repo rate hike.
  • The RBI last hiked the Repo rate by 25 bps to 6.50 per cent in August 2018.

What will be the impact of the CRR hike?

  • CRR is the percentage of depositors’ money that commercial banks have to mandatorily park with the Reserve Bank.
  • The 50 bps hike in CRR will suck out Rs 87,000 crore from the banking system.
  • The lendable resources of banks will come down accordingly.
  • It also means the cost of funds will go up and banks’ net interest margins could get adversely impacted.
  • If the RBI wants to infuse more liquidity into a system, it lowers the CRR and leaves banks with more liquidity to lend.
  • If the RBI wants to suck out liquidity from the system, it increases the CRR rate.

-Source: The Hindu, Indian Express

December 2023