Thursday, 15 January 2015

Daily News Mail

RBI slashes repo rate by 25 basis points to 7.75%

  • RBI slashed key policy rate by 0.25%, first cuts in rates since May 2013.
  • Reduces the policy repo rate under liquidity adjustment facility (LAF) by 25 basis points from 8.0% to 7.75% with immediate effect.
  • Consequently, the reverse repo rate under the LAF stands adjusted to 6.75%, and the marginal standing facility (MSF) rate and the Bank Rate to 8.75% with immediate effect
  • The move comes at a time when inflation is steadily coming down and cries for a rate cut were growing loud.  
  • The government's decision to stick to the fiscal deficit target of 4.1% of GDP for 2014-15 was another factor which influenced this decision.
  • Lending rates of Banks as well as EMIs for Home, Auto loans to come down.
  • Keep the Cash Reserve Ratio (CRR) of scheduled banks unchanged at 4.0% of net demand and time liabilities (NDTL).
  • Continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auction.
  • RBI CPI target for January 2015 - 8% and CPI target for January 2016 - 6%.
  • The inflation rate in India was recorded at 5%  in December of 2014.

What is Repo Rate ?
The rate at which the RBI lends money to commercial banks is called repo rate. 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 .

What is Reverse Repo Rate ?
Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest. 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.

What is Cash Reserve Ratio ?
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. Scheduled banks are required to maintain with the RBI an average cash balance, the amount of which shall not be less than 4% of the total of the Net Demand and Time Liabilities (NDTL), on a fortnightly basis.

What is Marginal Standing Facility ?
Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities.
MSF is a very short term borrowing scheme for scheduled commercial banks. Banks may borrow funds through MSF during severe cash shortage or acute shortage of liquidity.

Banks often face liquidity shortfalls due to mismatch in their deposit and loan portfolios. These are usually very short term and banks can borrow from RBI for one day period by offering dated government securities.

The RBI had introduced the marginal standing facility (MSF) in its Monetary Policy in 2011-12.

Under MSF, banks can borrow funds overnight up to 1% (100 basis points) of their net demand and time liabilities (NDTL) i.e. 1% of the aggregate deposits and other liabilities of the banks. NDTL liabilities represent a bank's deposits and borrowings from others.

Banks can borrow through MSF on all working days except Saturdays, between 3:30pm and 4:30pm in Mumbai where RBI has its headquarters.The minimum amount which can be accessed through MSF is Rs. 1 crore and in multiples of Rs. 1 crore.

What is Statutory Liquidity Ratio ?
Every bank in India has to maintain at the close of business every day, a minimum proportion of their net demand and time liabilities as liquid assets in the form of cash, gold and government securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).
In simple words, it is the percentage of total deposits banks have to invest in government bonds and other approved securities. A SLR bond also qualifies for the portfolio maintained by banks to meet the liquidity requirement. RBI in August, 2014 cut the SLR for banks by 0.50% point and it now stands at 22.0%.

Repo Rate vs Bank Rate - 
Repo rate : Bank sells the security to RBI to raise money. When banks sell security , banks promise to buy back the same security from RBI at a predetermined date with an interest at the rate of REPO . It is actually a repurchase agreement. 
Bank Rate : Bank rate is the rate at which RBI lends money to commercial banks for meeting shortfall for a long period without  selling or buying any security.

Kiran Bedi joins BJP; says will ensure Delhi gets 'corruption-free government'
  • Former IPS officer Kiran Bedi joined the BJP.
  • Bedi who joined BJP in the presence of party chief Amit Shah and Finance Minister Arun Jaitley, will in all likelihood be the 'undeclared CM candidate' in the upcoming polls and act as a counter-weight to Arvind Kejriwal.
  • However, Amit Shah refused to declare Bedi as the CM candidate but said, "BJP will be strengthened by Kiran Bedi joining the party and afterwards during government formation in Delhi.

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