RBI lowers repo rate to 7.25 per cent

The Reserve Bank of India in its second bi-monthly policy, announced recently, has reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5% to 7.25% with immediate effect. It has also lowered its growth estimate for this fiscal to 7.6% flagging the risks of a below-par monsoon and higher inflation by early next year.

Key rates:

  • Repo Rate- 7.25%
  • Cash reserve ratio (CRR): 4.0% of net demand and time liabilities (NDTL)
  • Reverse repo rate: 6.25%
  • Marginal standing facility (MSF): 8.25%

Key terms:

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI. If the central bank decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excessive money from the system.

Repo Rate is the rate at which the RBI lends money to commercial banks. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa. The repo rate in India is similar to the discount rate in the US.

Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.

Marginal standing facility (MSF) rate is the rate at which banks borrow funds overnight from the Reserve Bank of India (RBI) against approved government securities.

Sources: The Hindu, RBI.

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