Reserve Bank of India Increased the Repo Rate by 25 Basis Points to 7.75 %from 7.50%

The Reserve Bank of India (RBI) on 29 October 2013 released the Second Quarter Review of Monetary Policy 2013-14.According the released statement by the RBI, the Repo rate increased by 25 basis points from 7.5 percent to 7.75 percent.

The highlights of the Second Quarter Review of Monetary Policy 2013-14

• RBI reduced the marginal standing facility (MSF) rate by 25 basis points from 9.0 percent to 8.75 percent with immediate effect.
• RBI also increased the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 percent to 7.75 percent with immediate effect.
• The liquidity provided through term repos of 7-day and 14-day tenor has been increased from 0.25 percent of net demand and time liabilities (NDTL) of the banking system to 0.5 percent with immediate effect.
• Cash Reserve Ratio (CRR) unchanged at 4 Percent
• Repo rate hiked due to upturn of inflation and other factors.
• Food price pressures may ease with the arrival of summer crop harvest and seasonal moderation.
• RBI downward FY14 GDP growth to 5 percent from 5.7 percent.
• Both WPI (wholesale price index) and CPI (consumer price index) inflation may stay range-bound around the current levels that remain above comfort levels.

About the Repo (Repurchasing operation) rate

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. This is called repurchase rate because when they borrow money from the RBI, they keep government securities with the central bank as collateral. When they pay the money back to RBI, they take the collateral back.
Repo rate is used by monetary authorities to control inflation.

When inflation is high, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation. The central bank takes the contrary position in the event of a fall in inflationary pressures.

About Reverse repo

Reverse repo rate is the rate at which commercial banks lends to RBI. Repo rate is always higher than the reverse repo rate.

About Cash reserve ratio (CRR)    

Cash Reserve Ratio (CRR) is the amount of funds that all Scheduled Commercial Banks (SCB) excluding Regional Rural Banks (RRB) are required to maintain without any floor or ceiling rate with RBI with reference to their total net Demand and Time Liabilities (DTL) to ensure the liquidity and solvency of Banks.

About Statutory Liquidity Ratio (SLR)

 SLR stands for Statutory Liquidity Ratio. Apart from CRR, every bank is required to maintain in India at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). At present SLR is 23 percent.

About Marginal Standing Facility (MSF)

Marginal Standing Facility (MSF) is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12) and refers to the penal rate at which banks can borrow money from the central bank over and above what is available to them through the Liquidity Adjustment Facility window.