The Reserve Bank of India, the central banking institution of India, controls the monetary policy of the Indian currency. The RBI recently reduced the important policy rates by 25 basis points on 4 October 2019 at a monetary policy review meeting. The current repo rate as on 4 October 2019 is 5.15%.
Some of the major functions of RBI include supervising banks and financial institutions, managing exchange rates, act as banker’s bank, control inflation, maintain deflation level and detect fake currency. From time to time, RBI controls liquidity and money supply in the market and thereby, ensures overall economic growth.
Types of Interest rates fixed by RBI
- Repo Rate: We all approach banks when we face a financial shortfall. Likewise, banks approach the Central Bank, which is the Reserve Bank of India in our country, if they face a financial crisis. Repo Rate or repurchase rate is the rate at which the RBI lends funds to commercial banks and other financial institutions within the country.
Simply put, banks borrow funds from the Central Bank of India by selling government securities with a legal agreement to repurchase the securities sold on a given date at a predetermined price. The rate of interest charged by RBI while they repurchase the securities is called Repo Rate. The current Repo Rate as fixed by the RBI is 5.15%.
On 7 August 2019, the Reserve Bank of India lowered the repo rate (key lending rate) by 35 basis points (bps). That was the fourth time this year that the repo rate had been cut by the RBI. However, in the latest revision, which was made on 4 October 2019, the repo rate was further decreased by 25 bps and the effective rate as on 4 October 2019 is 5.15% now.
The reverse repo rate has also decreased to 4.90% and the Marginal Standing Facility Rate (MSF) and the Bank Rate have decreased to 5.40%.
History of Changes to Repo Rate
The Reserve Bank of India had increased the Repo Rate from 6% p.a. to 6.25% p.a. on 6 June 2018. This hike in repo rate was the first in more than four years. The last time the repo rate was increased before this was in January 2014. The Reserve Bank of India increased the Repo Rate again on the 1st of August 2018 from 6.25% to 6.50%. Even the reverse repo rate was increased to 6.25% from 6%, and the Marginal Standing Facility Rate went up by 25 basis points to 6.75% from 6.50%.
However, there was a decline of 25 basis points in the repo rate, reverse repo rate, and Marginal Standing Facility Rate on 7 February 2019, followed by another reduction by 25 basis points on 4 April 2019. The last change was made on 6 June 2019, wherein the repo rate was reduced to 5.75%. After the reduction of 35 bps on 7 August 2019, the repo rate stood at 5.40%. With the implementation of the latest revision, the repo rate now stands at 5.15% with effect from 4 October 2019.
The change in the repo rate will also affect all the other types of rates fixed by RBI and private banks, which are discussed in detail below.
Here’s a snapshot of all the repo rate changes that have occurred since October 2005:
|Updated On||Repo Rate|
|04 October, 2019||5.15%|
|07 August, 2019||5.40%|
|06 June, 2019||5.75%|
|04 April, 2019||6%|
|07 February, 2019||6.25%|
|01 August, 2018||6.50%|
|06 June, 2018||6.25%|
|07 February, 2018||6.00%|
|02 August, 2017||6.00%|
|04 October, 2016||6.25%|
|05 April, 2016||6.50%|
|29 September, 2015||6.75%|
|02 June, 2015||7.25%|
|04 March, 2015||7.50%|
|15 January, 2015||7.75%|
|28 January, 2014||8.00%|
|29 October, 2013||7.75%|
|20 September, 2013||7.50%|
|03 May, 2013||7.25%|
|17 March, 2011||6.75%|
|25 January, 2011||6.50%|
|02 November, 2010||6.25%|
|16 September, 2010||6.00%|
|27 July, 2010||5.75%|
|02 July, 2010||5.50%|
|20 April, 2010||5.25%|
|19 March, 2010||5.00%|
|21 April, 2009||4.75%|
|05 March, 2009||5.00%|
|05 January, 2009||5.50%|
|08 December, 2008||6.50%|
|03 November, 2008||7.50%|
|20 October, 2008||8.00%|
|30 July, 2008||9.00%|
|25 June, 2008||8.50%|
|12 June, 2008||8.00%|
|30 March, 2007||7.75%|
|31 January, 2007||7.50%|
|30 October, 2006||7.25%|
|25 July, 2006||7.00%|
|24 January, 2006||6.50%|
|26 October, 2005||6.25%|
- Reverse Repo Rate: When Reserve Bank of India faces a financial crunch, they invite commercial banks and other financial institutions to deposit their excess funds into RBI treasury and offers them excellent interest rates. Similarly, when banks have excess funds, they voluntarily transfer it to RBI as their money is safe and secure with them. Generally, Reverse Repo Rate is always lesser than Repo Rate.
The Reverse Repo Rate was lowered by the RBI to 6.00% on 7 February 2019, followed by another reduction to 5.75% on 4 April, 2019. It was further brought down to 5.50% on 6 June 2019. Now the reverse repo rate stands at 4.90% after the latest revision.
- Marginal Standing Facility Rate (MSF): When banks face acute financial shortage, they can avail this special facility offered by RBI. In MSF, banks can borrow cash from RBI against their approved government securities. This option is preferred during emergency and critical situations only. MSF rate is always higher than Repo Rate as banks need the funds instantly. The Marginal Standing Facility rate currently stands at 5.40%.
- Bank Rate: Bank Rate is the rate of interest charged by The Central Bank of India against loans offered to commercial banks. Bank rate is usually higher than repo rate. Unlike repo rate, bank rate directly affects the end user, in this case the customer, as high bank rates mean high lending rates.
When banks pay high interest rate to obtain loan from RBI, they in return charge the customer high interest rate to break even. Also known as “Discount Rate”, bank rate is a powerful tool used by the RBI to control liquidity and money supply in the market. The current Bank Rate is the same as Marginal Standing Facility rate, i.e. 5.40%.
- Cash Reserve Ratio (CRR): In India, banks are required to retain a certain percentage of their deposits as liquid cash. However, banks prefer to deposit this liquid cash with the Reserve Bank of India, which is equivalent to having cash in hand. The percentage of the deposits that should be kept aside by banks is called Cash Reserve Ratio. CRR is fixed by The Reserve Bank of India. For example: If the bank deposit amount is Rs.100 and the CRR is 10% p.a., the liquid cash that the bank should have at all times is Rs.10. The remaining funds, which is Rs.90 in this case can be used for lending and investment purposes. RBI has the power to determine the lending capacity of the banks in India through CRR. They will increase CRR if they want to reduce the amount that the banks can lend and vice versa. The current CRR is 4% p.a.
- Statutory Liquidity Ratio (SLR): At the end of every business day, banks are required to maintain a minimum ratio of their Time liabilities (when the bank has to wait to redeem their liabilities) and Net Demand (when bank can withdraw money from these accounts immediately) in the form of liquid assets like gold, cash and government securities. The ratio of time liabilities and liquid assets in demand is called Statutory Liquidity Ratio or SLR. The maximum SLR that The Reserve Bank of India can set is 40% p.a. However, the current SLR is set at 18.50% p.a.
- Base Rate: The Reserve Bank of India sets a minimum rate below which banks in India are not allowed to lend to their customers. This minimum rate is called the Base Rate in banking terms. It is the minimum rate of interest the banks are permitted to charge their customers. The new Base Rate as fixed by RBI is in the range of 8.95% - 9.40% p.a.
- Marginal Cost of Funds based Lending Rate (MCLR): RBI made changes to the existing Base Rate system this year. They have introduced Marginal Cost of Funds based Lending Rate or MCLR which is a new methodology to set the lending rates for commercial banks.
Previously, banks used to lend as per the Base Rate fixed by The Reserve Bank of India but with the introduction of MCLR, banks will have to lend using rates linked to their funding costs.
Simply put, bank raises their funds through deposits, bonds and other investments. For the banks to function smoothly, there are costs involved like salaries, rents and other bills. Considering that banks also need to make profits every year, RBI has included the expenses of the bank and have come up with a formula which can be used by banks to determine their lending rate. With the reduction of repo rate, some banks have reduced MCLR up to 90 basis points. The current MCLR (overnight) fixed by the RBI stands in the range of 7.65% to 8.10%.
- Savings Deposit Rate:The interest rate earned by an account holder for the amount maintained in their savings account is called savings deposit rate. The current Savings Deposit Rate as set by the RBI is in the range of 3.25% to 3.50%
- Term Deposit Rate: Customers who deposit money into their account and agree to fix it till a particular date are awarded with the term deposit rate. The term deposit rate for senior citizens is usually 0.5% more than that for ordinary citizens.The interest rate of Term Deposits that the Reserve Bank of India has set ranges from 6.25% to 6.85% as on 4 October 2019.
- Call Rate: It is the interest rate paid by the banks for lending and borrowing funds for a maturity period of 1 to 14 days. Call Rate is also known as the interbank borrowing rate. It deals with short-term lending between banks. The Call Rate set by the RBI as on 4 October 2019 is in the range of 3.70% to 5.30%.
In conclusion, policy rates are subjected to change without any warning as RBI constantly monitors the supply of money in the economy and takes decisions accordingly.