RBI’s first monetary policy review of FY17

The Reserve Bank of India (RBI), in its latest monetary policy review, has slashed key lending rate by 25 basis points.

Key facts:

ü  Repo rate was reduced by 25 basis points from 6.75% to 6.5%.

ü  The cash reserve ratio (CRR), which is the quantum of liquid funds against deposits which commercial banks have to hold, has been left unchanged at 4%.

ü  The minimum daily maintenance of CRR has been cut to 90% from 95%.

ü  Reverse repo rate has been increased to 6% from 5.75%.

ü  GDP growth is projected to improve gradually to 7.6% in 2016-17.

ü  Retail inflation is projected to moderate in 2016-17 to around 5%.

ü  The marginal standing facility (MSF) rate stands at 7%.

ü  The bank rate which is aligned to the MSF rate stands at 7%.

ü  The policy rate corridor narrowed from 100 basis points (bps) to 50 bps.

ü  The statutory liquidity ratio, or the value of specified securities which commercial banks have to subscribe to, is at 21.25%, effective from April 2.

Glossary:

Basis Point: It is one hundredth of one percent. 1 basis point means 0.01%. Used for measuring change in interest rate/yield.

MSF: Marginal standing facility is a window for banks to borrow from Reserve Bank of India in emergency situation when inter-bank liquidity dries up completely. Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short.

Repo rate: is the rate at which the RBI lends shot-term money to the banks against securities.

Reverse Repo rate: is the rate at which banks park their short-term excess liquidity with the RBI. The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns.    

SLR: Every bank is required 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 un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). An increase in SLR restricts the bank’s leverage position to pump more money into the economy.  

CRR: Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, Banks don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivlanet to holding cash with RBI. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. It is a tool used by RBI to control liquidity in the banking system.