What changed
The repo rate under the Liquidity Adjustment Facility was increased by 25 basis points from 6.25% to 6.50%. The reverse repo rate was also raised by 25 basis points from 5.25% to 5.50%, effective immediately.
What it means for you
Banks will face higher cost for borrowing from RBI under LAF, while their surplus funds parked with RBI will earn slightly more. This tightening signals RBI's intent to control inflation, potentially leading to higher lending rates and reduced liquidity in the banking system.
What you must do
- Review your bank's LAF borrowing and surplus deployment strategies to account for the new rates.
- Assess the impact on your net interest margin and adjust lending and deposit rates accordingly.
- Communicate the rate changes to your treasury and ALCO teams for immediate action.
- Monitor RBI's future policy stance for further rate adjustments.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), Primary Dealers, Treasury departments of banks, Borrowers and depositors indirectly
When did this rate change take effect?
The repo and reverse repo rate hikes were effective from January 25, 2011, the date of the announcement.
Are any other terms of the LAF scheme changing?
No, all other terms and conditions of the current LAF Scheme remain unchanged.
Why did RBI increase these rates?
The increase was part of the Third Quarter Review of Monetary Policy 2010-11, aimed at managing inflation and liquidity conditions.