What changed
The fixed repo rate under the Liquidity Adjustment Facility was increased by 50 basis points to 8.50%, effective June 25, 2008. The reverse repo rate remains unchanged at 6.00%. All other terms and conditions of the LAF scheme stay the same.
What it means for you
Banks will face higher cost of borrowing from RBI, which will likely transmit to higher lending rates for customers. This move signals RBI's commitment to controlling inflation, potentially slowing credit growth and impacting loan demand. Lenders need to reassess their asset-liability management and pricing strategies.
What you must do
- Review and adjust lending and deposit rates to reflect the higher repo rate.
- Reassess liquidity management and borrowing costs under LAF.
- Communicate rate changes to customers and update loan pricing models.
- Monitor inflation trends and RBI's future policy signals for further adjustments.
Who it affects
All scheduled commercial banks (excluding RRBs), Primary dealers, Borrowers with floating rate loans, Treasury and ALM teams
Why did RBI increase the repo rate?
RBI raised the repo rate by 50 bps to 8.50% to align with the monetary policy stance for 2008-09, based on domestic and global macroeconomic and financial developments, primarily to curb inflationary pressures.
What is the impact on reverse repo rate?
The reverse repo rate remains unchanged at 6.00%, so the corridor between repo and reverse repo widens, making it more expensive for banks to borrow from RBI while keeping the floor for overnight rates steady.
When does this change take effect?
The new repo rate of 8.50% is effective from June 25, 2008, as specified in the RBI notification.