What changed
The Monetary Policy Committee increased the policy repo rate by 40 basis points from 4.00% to 4.40%, effective immediately. Consequently, the SDF rate rose from 3.75% to 4.15% and the MSF rate from 4.25% to 4.65%. All other LAF scheme terms remain unchanged.
What it means for you
Banks will face higher cost of funds as the repo rate hike directly raises borrowing costs from RBI. Lending rates, especially floating-rate loans, are likely to increase, impacting borrower demand and NIMs. The MSF hike also raises the emergency borrowing cost, tightening liquidity conditions.
What you must do
- Review and adjust your marginal cost of funds-based lending rate (MCLR) and external benchmark lending rates (EBLR) to reflect the new repo rate.
- Communicate with borrowers about potential loan EMI increases and assess credit risk for floating-rate portfolios.
- Reassess liquidity management strategies given the higher SDF and MSF rates, and optimize your LAF participation.
- Update internal treasury and ALCO models to incorporate the new policy rate corridor.
Who it affects
All scheduled commercial banks, Primary dealers, Liquidity Adjustment Facility participants, Borrowers with floating-rate loans
When does the new repo rate take effect?
The repo rate hike to 4.40% is effective immediately from May 4, 2022, as per the RBI notification.
How does this affect my bank's lending rates?
Banks typically pass on repo rate changes to floating-rate loans linked to external benchmarks like the repo rate. Expect an increase in EMIs for such loans.
What are the new SDF and MSF rates?
The SDF rate is now 4.15% (up from 3.75%) and the MSF rate is 4.65% (up from 4.25%), effective immediately.