What changed
The repo rate under the Liquidity Adjustment Facility was increased by 50 basis points from 7.50% to 8.00% with immediate effect. Consequently, the reverse repo rate automatically adjusted to 7.00% and the Marginal Standing Facility rate to 9.00%.
What it means for you
Banks will face higher cost of borrowing from RBI, which will likely push up lending rates and deposit rates. This tightening aims to curb inflation but may slow credit growth. Lenders need to reassess their asset-liability management and pricing strategies.
What you must do
- Review and adjust lending and deposit rates in line with the higher repo rate.
- Reassess liquidity management and borrowing plans under LAF and MSF.
- Communicate rate changes to customers and update product pricing.
- Monitor inflation and RBI's future policy signals for further rate actions.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), Primary Dealers, Borrowers with floating rate loans, Depositors
Why did RBI hike the repo rate by 50 bps?
The hike was announced in the First Quarter Review of Monetary Policy 2011-12 to contain inflationary pressures.
How does this affect my bank's lending rates?
Higher repo rate increases your cost of funds, so you may need to raise lending rates, impacting borrowers with floating rate loans.
Are reverse repo and MSF rates also changed?
Yes, reverse repo automatically adjusted to 7.00% and MSF rate to 9.00% following the repo rate increase.