What changed
The repo rate under LAF was cut by 50 basis points from 8.50% to 8.00%. Consequently, the reverse repo rate automatically became 7.00% and the MSF rate became 9.00%. Additionally, the MSF borrowing limit for scheduled commercial banks was raised from 1% to 2% of their NDTL.
What it means for you
This rate cut signals an accommodative monetary stance, reducing banks' cost of funds from RBI. The higher MSF limit gives banks more flexibility to manage short-term liquidity mismatches. Lenders can expect lower borrowing costs, which may translate into reduced lending rates over time.
What you must do
- Update your treasury systems to reflect the new repo rate of 8.00%, reverse repo rate of 7.00%, and MSF rate of 9.00%.
- Adjust your MSF borrowing limit calculation to 2% of NDTL for liquidity planning.
- Review your asset-liability management to align with the lower policy rate and potential impact on lending and deposit rates.
- Communicate the rate changes to your treasury and risk management teams for immediate implementation.
Who it affects
All scheduled commercial banks (excluding RRBs), Primary dealers, Treasury departments, Asset-liability management teams
When do these changes take effect?
The repo rate cut and MSF limit increase are effective immediately from April 17, 2012, as announced in the Annual Monetary Policy 2012-13.
How does the MSF limit change impact my bank?
Your bank can now borrow up to 2% of its NDTL under MSF, up from 1%, providing a larger liquidity cushion for overnight needs at the MSF rate of 9.00%.
Will the reverse repo and MSF rates always adjust automatically with repo rate changes?
Yes, as per the circular, the reverse repo rate and MSF rate adjust automatically based on the repo rate change, maintaining the fixed spread.