Mumbai: After nine years, the Reserve Bank of India (RBI) late Monday evening tweaked the bank rate, a medium-term signal rate. The rate has been hiked “to realign it with the marginal standing facility (MSF) rate” as a “one-time technical adjustment” to link it with the main policy repo rate, an RBI release said.
The bank rate, a benchmark rate at which RBI buys or re-discounts bills of exchange or other commercial papers eligible for purchase, was hiked with immediate effect to 9.5% from 6%.
In April 2003, RBI pared the bank rate by 25 basis points (bps) to a three-decade low of 6%. One basis point is one-hundredth of a percentage point.
Henceforth, the bank rate will change whenever there is a change in the repo rate, RBI said.
Repo rate is the rate at which RBI infuses liquidity into the system. It drains liquidity through reverse repo. Currently, the repo rate is 8.5% and reverse repo rate is 7.5%.
The bank rate acts as the penal rate charged on banks for shortfalls in meeting their reserve requirements and is also used as a reference rate by several organizations for indexation purposes.
One such reserve requirement is the cash reserve ratio (CRR) or the portion of deposits that banks have to keep with RBI. It is currently 5.5%.
Banks are also required to invest at least 24% of their deposits in government securities which is called statutory liquidity ratio (SLR).
“Being the discount rate, the bank rate should technically be higher than the policy repo rate. The bank rate has, however, been kept unchanged at 6% since April 2003. This was mainly (because) monetary policy signalling was done through modulations in the reverse repo rate and the repo rate,” the RBI release said.
“Under the revised operating procedure, marginal standing facility, instituted at 100 bps above the policy repo rate, has been in operation, which more or less served the purpose of the bank rate,” RBI said in a press release.
MSF is a special facility for banks to access overnight money up to 1% of their deposits. Banks raise this money at 9.5%.
In its earlier avatar, bank rate was the refinance rate and was used just like the repo rate now—to borrow money from RBI by offering government bonds as collaterals.
Subsequently, this was delinked from the refinance rate and was only used for RBI’s ways and means advances to the central and state governments. In other words, it became the rate for government financing.
At the same time, it is also a forward-looking statement on the RBI’s views on interest rates in the medium term.
Until now it was considered a defunct rate and was not used as reference rate by either banks or RBI.
“All penal interest rates on shortfall in reserve requirements, which are specifically linked to the bank rate, also stand revised,” RBI said.
“Reserve Bank consulted various organizations/stakeholders that rely on bank rate as a reference rate. Based on the feedback received, it is determined that the bank rate should normally stay aligned to the MSF rate,” it said.
“This should be viewed and understood as one-time technical adjustment to align the bank rate with the MSF rate rather than a change in the monetary policy stance,” RBI said.
joel.r@livemint.com