What changed
The repo rate under the Liquidity Adjustment Facility was increased by 50 basis points from 6.75% to 7.25%, effective immediately. Consequently, the reverse repo rate, which is set at a spread of 100 bps below the repo rate, moved to 6.25%. All other terms and conditions of the LAF scheme remained unchanged.
What it means for you
This rate hike signals RBI's tightening stance to curb inflation, increasing the cost of funds for banks borrowing from the central bank. Banks will likely pass on higher costs to customers through increased lending rates, potentially slowing credit demand. The wider repo-reverse repo spread maintains the corridor for short-term rates.
What you must do
- Review and adjust your bank's lending and deposit rates to reflect the higher repo rate.
- Reassess liquidity management strategies given the increased cost of LAF borrowing.
- Communicate the rate change impact to treasury and ALCO teams for immediate action.
- Monitor credit demand and repricing of loan portfolios in response to higher rates.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), Primary Dealers, Treasury and ALCO teams, Borrowers with floating rate loans
Why did RBI hike the repo rate by 50 bps in May 2011?
The hike was part of the Annual Monetary Policy 2011-12, aimed at controlling inflation by tightening monetary conditions.
What is the new reverse repo rate after this change?
The reverse repo rate is set at 100 bps below the repo rate, so it stands at 6.25% with immediate effect.
Does this change affect any other LAF terms?
No, all other terms and conditions of the current LAF Scheme remain unchanged.