What changed
The fixed repo rate under the Liquidity Adjustment Facility was reduced by 100 basis points from 7.5% to 6.5%, and the reverse repo rate was cut by 100 basis points from 6% to 5%, effective December 8, 2008. All other terms and conditions of the LAF scheme remain unchanged.
What it means for you
Banks can now borrow from RBI at a lower cost, reducing their funding expenses and encouraging lending. The reverse repo rate cut makes parking funds with RBI less attractive, nudging banks to deploy surplus liquidity into credit or investments. This coordinated easing aims to boost economic activity by lowering borrowing costs across the system.
What you must do
- Review and adjust your bank's lending and deposit rates to reflect the lower policy rates.
- Reassess liquidity management strategies to optimize use of the LAF window at revised rates.
- Communicate the rate changes to treasury and credit teams for updated pricing of loans and advances.
- Monitor market response and RBI's future guidance for further policy adjustments.
Who it affects
All scheduled commercial banks (excluding RRBs), Primary dealers, Borrowers and depositors indirectly through rate transmission
When do these rate changes take effect?
The revised repo and reverse repo rates are effective from December 8, 2008, the same date as the notification.
Do the terms of the LAF scheme change besides the rates?
No, all other terms and conditions of the current LAF scheme remain unchanged as per the notification.
Why did RBI cut rates by 100 bps each?
RBI cited a review of evolving macroeconomic and monetary/liquidity conditions as the reason for the reduction, aiming to ease liquidity and support economic activity.