RBI hikes bank rate to 9.5%

After a gap of nearly nine years, the Reserve Bank of India has increased the bank rate by 3.5 percentage points to 9.5 per cent with immediate effect.

“This (the increase) should be viewed and understood as one-time technical adjustment to align the bank rate with the marginal standing facility (MSF) rate rather than a change in the monetary policy stance,” RBI said in a notification, adding the new rate will be with effect from February 13.

The bank rate has lost its significance as a monetary policy tool as the central bank signals stance through changes in repo, the rate at which banks borrow short-term funds from RBI.

Penal rate

The bank rate, which is the standard rate at which the RBI buys or re-discount bills of exchange or other commercial paper, is now used as a penal rate which the banks have to pay for their failure to meet the mandatory cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

The bank rate, which has been increased by 350 basis points or 9.50 per cent was kept unchanged since April 2003.

According to RBI, it should technically be higher than the repo rate, which is the policy rate. The repo rate currently stands at 8.5 per cent, while the reverse repo rate is 7.5 per cent.

Liquidity Adjustment Facility

It was kept unchanged, “mainly for the reason that monetary policy signalling was done through modulations in the reverse repo rate and the repo rate under the Liquidity Adjustment Facility (till May 3, 2011) and the policy repo rate under the revised operating procedure of monetary policy (from May 3, 2011 onwards)”, the RBI said.

Marginal Standing Facility

Moreover, it added: “Under the revised operating procedure, MSF, instituted at 100 basis points above the policy repo rate, has been in operation, which in many ways serves the purpose of the bank rate.”

While the policy repo rate and the MSF rate have become operational, the bank rate continued to remain at 6 per cent. The bank rate is also used by several other organisations as a reference rate for indexation purposes.

The RBI said that it has consulted various stakeholders relying on the bank rate as a reference rate before arriving at the decision to revise it.

“Based on the feedback received, it is determined that the bank rate should normally stay aligned to the MSF rate,” it said.