RBI keeps all key rates intact in fourth bi-monthly monetary policy

The RBI announced its fourth bi-monthly monetary policy on September 30, 2014. This follows the third bi-monthly monetary policy which was announced in August 2014.

CRR

The CRR of scheduled was kept unchanged at 4% of the bank’s NDTL (net demand and time liabilities). CRR refers to the proportion of its deposits that a bank has to hold in the form of cash. The RBI uses CRR as a tool to control liquidity in the market (and thereby inflation) and to reduce the risk to investors’ deposits.

SLR (Statutory Liquidity Ratio)

The SLR remained unchanged at 22%. SLR refers to the proportion of its total NDTL that the bank has to maintain in form of liquid assets. These liquid assets can either be cash or gold or unencumbered government securities. This directly affects the proportion of funds that the bank can lend.

LAF (Liquidity Adjustment Facility)

The policy repo rate under the LAF was kept unchanged at 8%. The reverse repo rate also remained unchanged at 7%. LAF is the tool by which banks borrow to meet their short term day to day monetary requirements. Difference between LAF and Bank rate is the requirement of collateral. Repo rate is the interest that banks pay to borrow from the RBI. Reverse repo is the rate at which RBI borrows from banks after lending securities as collateral. LAF was introduced in India in accordance with the recommendation of the Narasimham Commttee on Banking Reforms.

 ECR Facility (Export Credit Finance)

The liquidity provided under the ECR Facility was reduced from 32% to 15% of eligible export credit outstanding. This change will be in effect from 10 of October, 2014.

 MSF (Marginal Standing Facility) and Bank Rate

MSF and Bank rate also saw no change at 9% for both. MSF is the rate at which only scheduled commercial banks are allowed to borrow from RBI. This is over and above the LAF. MSF acts as a last resort for bankers. Bank rate is the rate at which RBI lends to banks without any collateral such as government securities.

Liquidity under overnight repos

The RBI will continue to provide liquidity under overnight repos up to  0.25 %  of the specific bank’s NDTL will be given at the LAF repo rate.
Liquidity under 7 day and 14 day term repos
Liquidity for 7 day and 14 day term repos  up to 0.75% of NDTL of the banking system  will be provided through auctions

Month: Current Affairs - October, 2014