What changed
The repo rate under LAF was increased by 25 basis points from 5.75% to 6.00%, and the reverse repo rate was raised by 50 basis points from 4.50% to 5.00%, effective immediately. All other terms of the LAF scheme remain unchanged.
What it means for you
Banks will face higher cost of borrowing from RBI, squeezing net interest margins. The wider corridor between repo and reverse repo rates (now 100 bps) gives RBI more room to manage liquidity. Lenders may pass on higher rates to borrowers, potentially slowing credit demand.
What you must do
- Review your asset-liability management to account for higher funding costs.
- Communicate revised lending rates to customers if you plan to pass on the hike.
- Monitor liquidity positions closely as the reverse repo rate increase may drain excess funds.
- Update internal systems and treasury operations for the new LAF rates.
Who it affects
All scheduled commercial banks (excluding RRBs), Primary dealers, Treasury departments, Retail and corporate borrowers
Why did RBI hike repo and reverse repo rates in September 2010?
The hike was part of the Mid-Quarter Policy Review to curb inflationary pressures by tightening monetary policy.
How does the reverse repo rate increase affect banks?
Banks earn more on funds parked with RBI, but the higher rate also signals tighter liquidity, reducing excess funds in the system.
Will this impact loan interest rates immediately?
Banks may revise lending rates, especially on floating-rate loans, but the timing and extent depend on individual bank policies.