What changed
The repo rate under the Liquidity Adjustment Facility was increased by 25 basis points from 8.25% to 8.50%, effective October 25, 2011. Consequently, the reverse repo rate automatically adjusted to 7.50% and the Marginal Standing Facility rate to 9.50%. All other terms of the LAF and MSF schemes remained unchanged.
What it means for you
This rate hike signals RBI's continued tightening stance to contain 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 and impacting loan growth.
What you must do
- Review and adjust your bank's lending and deposit rates in line with the new policy rates.
- Communicate the rate change to treasury and ALCO teams for liquidity management.
- Assess the impact on your bank's net interest margin and loan portfolio.
- Update internal systems and reporting for the revised repo, reverse repo, and MSF rates.
Who it affects
All scheduled commercial banks (excluding RRBs), Primary dealers, Treasury and asset-liability management teams, Retail and corporate borrowers
Why did RBI hike the repo rate by 25 bps?
The hike was announced as part of the Second Quarter Review of Monetary Policy 2011-12 to curb inflationary pressures.
How does this affect my bank's borrowing costs?
Banks borrowing from RBI under LAF will now pay 8.50% instead of 8.25%, increasing short-term funding costs.
What happens to the reverse repo and MSF rates?
The reverse repo rate automatically adjusted to 7.50% and the MSF rate to 9.50%, effective immediately.