Repo rate cut
The RBI (Reserve Bank of India) reduced the country’s repo rate by 25 basis points on April 5, 2016, to 6.5%. The repo rate, or the repurchase option rate, is the key monetary policy rate for the RBI. It is the rate at which the RBI lends to commercial banks. The reverse of this rate, or the rate at which banks park money with the central bank, is known as the reverse repo rate.
A change in the repo rate is used to signal an increase or decrease in rates to commercial banks (IBN) (HDB). Other rates like the reverse repo rate and the MSF (marginal standing facility) are fixed against the repo rate. The rate impacts the movement of the rupee, which affects the revenue of exporters (TTM) and India-focused funds (ETGIX) (INDA) as well.
Other rate-related changes
Earlier, the reverse repo rate and the MSF were in a +/- 100 basis point policy corridor. This means that the reverse repo rate was fixed at 100 basis points lower than the prevailing repo rate while the MSF was fixed at 100 basis points higher.
However, along with the change in the repo rate in April, the RBI announced that it is narrowing the policy corridor to +/- 50 basis points. Thus, with a 25 basis point reduction and a narrowing of the policy corridor, the reverse repo rate fell to 6% while the MSF fell to 7%. The bank rate, which is aligned to the MSF rate, is also recalibrated to 7%.
These moves were aimed to modify the liquidity framework of the central bank, which had seen a major change in September 2014. These modifications are a result of a review of the impact of the change in the framework.
In the next article, let’s look into the details of the move.