RBI raises bank rate to 9.5%

The Reserve Bank of India (RBI) on Monday realigned the bank rate to marginal standing facility (MSF) rate in one-time technical adjustment. The bank rate now stands at 9.5 per cent as against six per cent earlier.

Any change in the MSF rate will lead to revision in the bank rate accordingly. The MSF rate is linked to the policy rate or repo rate, which is at 8.5 per cent. “This should be viewed and understood as a one-time technical adjustment to align the bank rate with the MSF rate, rather than a change in the monetary policy stance,” said RBI in a statement.

The central bank said the bank rate would be act as a penalty for banks that fail to meet reserve requirements under the Cash Reserve Ratio and Statutory Liquidity Ratio mandates. According to RBI norms, banks must maintain minimum 5.5 per cent of CRR and 24 per cent of SLR. The bank rate is also used by several other organisations as a reference rate for indexation purposes, said RBI.

The bank rate is the standard rate at which the central bank buys or re-discounts bills of exchange or other commercial papers eligible for purchase under Reserve Bank of India Act, 1934. “Since discounting or rediscounting by the RBI has remained in disuse, the bank rate has not been active,” said RBI. The central bank said technically bank rate should be higher than the policy rate but it was kept unchanged since April 2003. “This was mainly for the reason that monetary policy signaling was done through modulations in the reverse repo rate and the repo rate,” said RBI.

Since May 3, 2011 the operating procedure of monetary policy was revised setting repo rate as the policy rate. Reserve repo rate was set at 100 basis points below the repo rate and MSF rate at 100 basis points above the repo rate. Any revision in the repo rate would adjust the linked rates accordingly.

While repo rate is the rate at which banks borrow overnight funds from RBI against government securities, the MSF rate is the penal rate that banks should pay if they borrow from RBI by dipping into the SLR holding of 24 per cent.