The Reserve Bank of India (RBI) has decided on Monday to increase the Bank Rate by 350 basis points from 6 per cent to 9.50 per cent per annum with immediate effect.
The RBI said that it realigned the Bank Rate with Marginal Standing Facility (MSF) rate, which, in turn, is linked to the policy repo rate.
“This 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,” RBI said.
Henceforth, whenever there is an adjustment of the MSF rate, the Reserve Bank will consider and align the Bank Rate with the revised MSF rate. “All penal interest rates on shortfall in reserve requirements, which are specifically linked to the Bank Rate, also stand revised,” it added. 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 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, MSF, instituted at 100 basis points above the policy repo rate, has been in operation, which more or less served the purpose of the Bank Rate. At present, the repo rate is 8.50 per cent, reserve repo 7.50 per cent and MSF 9.50 per cent. Repo rate is the rate at which banks borrow funds from the central bank and reverse repo rate is the rate at which banks park their funds with the central bank. Under the MSF, banks are permitted to avail themselves of funds from the RBI on overnight basis.
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.