The Reserve Bank of India today cut the repo
rate by 25 basis points from 8% to 7.75% with immediate effect ahead of its sixth
bi-monthly policy review on February 3, 2015.This is the first repo rate cut since May 2013.
One basis point is one-hundredth
of a percentage point.
Consequently, the reverse repo rate under the
LAF (Liquidity Adjustment Facility) stands adjusted to 6.75 per cent, and the
marginal standing facility (MSF) rate and the Bank Rate to 8.75 per cent with
immediate effect.
The move is expected to bring down the borrowing costs in the economy, which the industry and the government believe is necessary to support the wobbly economic recovery.
Note: On
Dec 2, 2014, RBI, in its fifth bi-monthly monetary policy statement, kept the
key policy rates unchanged.
What is Repo Rate?
Ans – – It is the rate at which RBI lends money to the commercial banks in the
event of any shortfall of funds.
Note: i. Repo rate is used by monetary authorities to control inflation.
ii. REPO rate is the
rate of interest which RBI implements on the short term loans, i.e., from a
period ranging between 2 days to 3 months (90 Days
What happens
when RBI increase or reduce Repo Rate?
Ans – When the repo rate
increases, borrowing from the RBI becomes more expensive.
Note: The increase in repo rates would mean that
the RBI would charge a higher rate of interest for all money given out to
various commercial banks.
ii. The bank in turn would be forced to charge
its customers a higher rate of interest when it comes to home and auto loans to
balance the higher interest rate.
Reduction in Repo rate means: A reduction in the repo rate will help banks to get money at a cheaper
rate.
The bank in turn charges its customers a low
rate of interest when it comes to home and auto loans.
So, while on the one hand, inflation is under
controlled as there is less money to spend, growth suffers as companies avoid
taking loans at high rates, leading to a shortfall in production and
expansion.
Current
Rates are as follows:
1. Repo Rate – 7.75% (Changed)
2. Reverse Repo Rate – 6.75% (Changed)
3. CRR (Cash Reserve ratio) – 4% (Unchanged)
4. Bank Rate – 8.75% (Changed)
5. MSF (Marginal Standing Facility) – 8.75% (Changed)
6. SLR (Statutory Liquidity Ratio) – 22% (Unchanged)