Banking Rates One Must Know

May 5, 2011     Posted under: Investment

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With the proceeding in the last few days there are strong indications that the RBI might announce its intent to move to a regime where the repo rate will serve as the single policy rate. This will ensure that the banking system will always operate in a cash-deficit mode, force banks to force on deposit mobilization to improve liquidity and give better returns to customer.

What is Repo Rate?

It is the rate at which the RBI lends to banks. A higher repo pushes up banks borrowing costs, prompting them to increase interest rates for home, auto and corporate borrowers. It currently stands at 6.75%.

What is reverse repo rate?

It is the rate at which the RBI absorbs cash from the system. A higher reverse repo means that the central bank would suck cash from the system to cool prices. It currently stands at 5.75%.

What is bank rate?

The bank rate is the rate at which banks borrow from the RBI at a long-term basis. It has remained at 6% since 2003.

What are policy rate?

Policy rate acts the guide for final lending rate that banks charge from borrowers. In tight liquidity, the repo acts as the policy rate. In situations of excess liquidity, the reverse repo acts as policy rate.

What is the likely proposed system?

A RBI committee has recommended that the bank rate should be reintroduced as a “discount rate”, which would be pegged at 0.50 percentage points above the repo rate.

The reverse repo will serve as the floor rate, which will be pegged at one percentage point below the repo rate.

What would be the purpose of the “discount rate”?

The RBI can use it as a tool to inject liquidity in exceptional situations by lending to banks at this rate against bonds.

NitiN Kumar Jain

Nitin works in an IT MNC professionally but blogs and owns NKJ Live. He is also the co-owner of a professional start-up ARGHAM BYTES

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