RBI hiked repo rate by 25 points – What does it mean ?

The monetary policy committee (MPC) has voted on a majority to raise the repo rate by 25 basis points to 6.5 percent, according to Reserve Bank of India (RBI) Governor Shaktikanta Das. The marginal standing facility (MSF) will be revised to 6.75 percent, and the standing deposit facility (SDF) will remain at 6.25 percent.

What is Repo Rate and How it is significant ?

Repo rate is the interest rate at which a central bank (e.g. Reserve Bank of India) lends money to commercial banks. It is an important monetary policy tool used by central banks to control inflation and maintain stability in the financial system.

A decrease in repo rate leads to a decrease in the cost of borrowing for commercial banks, leading to an increase in credit availability and lower interest rates for consumers, spurring economic growth. On the other hand, an increase in repo rate makes borrowing more expensive, reducing the supply of credit and slowing down economic growth.

Thus, the repo rate is significant in that it has a direct impact on the economy by influencing the cost and availability of credit, and therefore has a direct impact on economic growth and inflation.

What is Marginal Standing Facility ?

Marginal Standing Facility (MSF) is a window provided by the central bank (e.g. Reserve Bank of India) to commercial banks for borrowing funds overnight in an emergency situation when they are facing a shortage of funds. The MSF rate is higher than the repo rate, and serves as a penalty rate for banks that are unable to manage their liquidity effectively.

In essence, MSF provides a safety net for banks facing sudden and acute cash shortages, and acts as a signal to the market of the central bank’s stance on monetary policy. Borrowing under MSF is considered a last resort option for banks, as the high interest rate makes it an expensive source of funding. The use of MSF can also be seen as an indication of stress in the banking system, and may trigger concerns about the health of individual banks or the financial system as a whole.

What is Standing deposit facility ?

Standing Deposit Facility (SDF) is a facility provided by the central bank (e.g. Reserve Bank of India) for commercial banks to park their surplus funds with the central bank on a daily basis. The SDF rate is lower than the policy repo rate and provides a low-risk and low-return investment option for banks to manage their liquidity.

Through SDF, banks can park their surplus funds with the central bank and earn a return on their excess liquidity, while also ensuring that their funds are safe and easily accessible when needed. The SDF rate acts as a floor for the market interest rate and helps in maintaining stability in the interbank market. It also provides the central bank with a tool to manage the liquidity in the financial system and maintain stability in the overnight money market.

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