Credit Policy - Highlights

Further to my post on the Credit Policy expectation, here are the highlights of the Credit Policy:

The Repo rate and the Reverse Repo Rate were increased by 25 basis points. Now the Repo rate stands at 6.5% and the Repo rate at 5.50%

The Cash Reseve Ratio (CRR) remains unchanged at 6%.

With inflation daunting the Indian economy and the government, the RBI is cautious in increasing the rate by 50 basis points - they settled for 25 bais points this time. I am sure that RBI will slowly start increasing the rates by another 50 basis points in the months to come (mostly in March).

How these rates impact the liquidity and the inflation? I am reproducing my earlier post on Repo & Reverse Repo below for your easy reference.

2. What is REPO RATE?

 

Repo (means Repurchase Agreement) Rate is the rate at which the banks borrow funds from the Reserve Bank of India to fund their shortfall (the money they require to do business vis-a-vis the money they have with them to lend). Repo rates plays a critical role in the liquidity position. If RBI wants more liquidity in the market, it will reduce the repo rate so that the borrowing cost becomes cheap for the banks. So they will borrow more and lend more. If the RBI wants to cut the liquidity position, it will increase the repo rate, so that the borrowings will be more expensive for the banks and result in reduced borrowings by the bank. This borrowings are of short-term in nature and often for overnight borrowing. It will help the RBI to push money into the banking system for more float.

3. What is a Reverse Repo Rate (RRR)?

As you would have guessed, it is the opposite of repo rate. It is the rate at which the RBI borrows or Banks placing their monies with RBI. This is a very handy tool for the RBI to control the availability of money in the banking system.

If the RRR is increased, the banks would prefer to place their funds with RBI, as it is the safest one. By this, the money circulation is curtailed. When RBI feels that there should be more money in the system, it would reduce the rate, so that the banks would lend to outsiders for a better interest rate. The RRR helps the RBI to absorb the liquidity from the banks.

With the fear of interest rate hike, the stock market is also in for correction.

Cheers,

Gopal