What changed
The fixed repo rate under the Liquidity Adjustment Facility (LAF) was increased by 50 basis points to 9.0%, effective July 30, 2008. The reverse repo rate remained at 6.0%. All other LAF terms stayed unchanged.
What it means for you
Banks will face higher borrowing costs from RBI, potentially leading to increased lending rates for customers. This tightening aims to curb inflationary pressures but may slow credit growth. Lenders should reassess their liquidity and pricing strategies.
What you must do
- Review and adjust lending and deposit rates to reflect higher cost of funds.
- Monitor liquidity positions closely as RBI retains flexibility to conduct variable rate or longer-term repos.
- Prepare for potential further tightening by stress-testing loan portfolios.
- Communicate rate changes to customers and update internal pricing models.
Who it affects
All scheduled commercial banks (excluding RRBs), Primary dealers, Borrowers with floating rate loans, Treasury and ALM teams
Why did RBI hike the repo rate by 50 bps?
The hike was in response to current macroeconomic and overall monetary conditions, as part of the First Quarter Review of the Annual Statement on Monetary Policy for 2008-09.
Will the reverse repo rate also change?
No, the reverse repo rate remains unchanged at 6.0% as per the circular.
Can RBI conduct repo auctions at variable rates?
Yes, RBI retains flexibility to conduct repo/reverse repo auctions at fixed or variable rates, and can also conduct overnight or longer-term operations as needed.