Repo to be reference rate for monetary policy- RBI, 9th Increase in rates by RBI in last one year

In line with international practice, the RBI on Tuesday decided to anchor monetary policy through a single short term lending rate known as repo rate. Unlike in the past, the rate at which the RBI borrows from banks (reverse-repo) will be the benchmarked 100 basis points below the repo rates.

According to the new policy format, the Central Bank has introduced an additional facility-Marginal Standing Facility (MSF) — for banks to borrow from it.

Under it, banks would be permitted to borrow short term funds from RBI up to one per cent of their deposits at 8.25 per cent, with effect from May 7.

“This transition to a single independently varying policy rate is expected to more accurately signal the monetary policy stance,” RBI governor D. Subbarao said in the ‘monetary policy statement for 2011-12’.

The changes have been undertaken on the basis of the recommendation of RBI’s expert panel which gave its report in March.

The group had suggested that a single rate be introduced to signal the monetary policy stance for effectively dealing with inflation without hurting growth.

Until now, repo, reverse repo and bank rate were used as tools by the RBI to inject or absorb liquidity from the system.

“The reverse repo rate will continue to be operative but it will be pegged at a fixed 100 basis points below the repo rate. Hence the reverse repo will no longer be an independent variable,” Subbarao said.

The repo rate, the rate at which the RBI lends to banks, now stands at 7.25 per cent while the reverse repo rate, at which it borrows from banks, is at 6.25 per cent.

In its annual policy statement today, the RBI hiked the repo rate by 50 basis points to contain inflation, the ninth hike since March 2010.