Bank rates Increased by 350 Basis Points from Today
WITH effect from the close of business yesterday (February 13, 2012), Reserve Bank of India has increased the Bank Rate by 350 basis points, i.e., from 6.00 per cent per annum to 9.50 per cent per annum.
Section 49 of the Reserve Bank of India Act, 1934 requires the Reserve Bank to make public (from time to time) the standard rate at which it is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under that Act.
Being the discount rate, the Bank Rate should technically be higher than the policy repo rate. The Bank Rate has, however, been kept unchanged at 6 per cent since April 2003. This was 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 (LAF) (till May 3, 2011) and the policy repo rate under the revised operating procedure of monetary policy (from May 3, 2011 onwards). Moreover, under the revised operating procedure, marginal standing facility (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 continues to remain at 6 per cent. Currently, the Bank Rate acts as the penal rate charged on banks for shortfalls in meeting their reserve requirements (cash reserve ratio and statutory liquidity ratio). The Bank Rate is also used by several other organisations as a reference rate for indexation purposes.
The RBI states that the increase in Bank Rate should be viewed and understood as one-time technical adjustment to align the Bank Rate with the MSF rate rather than a change in the monetary policy stance.
The penal interest rates on shortfall in reserve requirements, which are specifically linked to the Bank Rate, will also stand revised, which was 9% and 11% and will now be 12.5% and 14.5%.