What is a Repo Rate?

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the
rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to
get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more
expensive

RBI surprises market with repo, reverse repo rate cuts

Banks to consider lowering lending rates in a few days.

Less than a week after third-quarter GDP estimates showed a lower-than-expected 5.3 per cent
growth rate, the Reserve Bank of India on Wednesday surprised the market and sent fresh signals
to banks to lower lending and deposit rates by pruning the repo rate and the reverse repo rate by
50 basis points each.
The repo rate, or the rate at which RBI lends to banks, has been cut to 5 per cent, while the
reverse repo rate, or the rate at which the central bank absorbs liquidity, has been pared to 3.5 per
cent. The market had given up hopes of an immediate reduction after the central bank prodded
banks last week to lower rates.

CHEAPER MONEY
Repo rate (%)
Oct 20 ‘08 8.00
Nov 3 ‘08 7.50
Dec 8 ’08 6.50
Jan 2 ‘09 5.50
Mar 4 ‘09 5.00
Reverse repo rate (%)
Jun 8 ‘06 5.75
Jul 25 ‘06 6.00
Dec 8 ‘08 5.00
Jan 2 ‘09 4.00
Mar 4 ‘09 3.50
Around the time the central bank announced its latest move to boost economic activity, Canara
Bank said it would cut interest rates on housing and vehicle loans and domestic term deposits,
effective March 11.
Others banks, however, said their asset-liability committees (alcos) would meet over the next
few days to examine the cost of funds and then decide whether to reduce lending rates.
"Wednesday’s move is prompted by the fact that inflation is coming down and there is a
possibility that the numbers may go down to negative territory in June. We expect the cost of
funds to drop in a fortnight. When the cost of funds comes down for us, we will pass on the
benefit to borrowers," said HDFC Vice-Chairman and Managing Director, Keki Mistry.
An Axis Bank executive said that the bank would review its home loan rates soon but did not
comment on the prime lending rate.
“This is a signal from RBI to review the rates. Our alco will meet in three or four days to take
stock of costs and then decide the issue,” Bank of Maharashtra Chairman and Managing Director
Allen C A Pereira said.
“RBI has sought to create conditions conducive to consumption and investment, taking into
account global developments and their impact on India: a slowdown in growth on one hand and
decline in inflation on other,” said ICICI Bank CEO-designate Chanda Kochhar.
The RBI move is largely a sentiment booster for banks rather than a technical one, as banks
already have ample liquidity and hardly borrow from the repo window right now, she added.
A cut in reverse repo rates will discourage banks from parking surplus funds with RBI through
the liquidity adjustment facility and encourage them to boost lending to the commercial sector.
Over the past three months, RBI has slashed the rate 250 basis points.
With the latest repo rate reduction, the fifth since October 20, the overall cut since the global
credit crisis intensified adds up to 400 basis points.
Since September, the central bank has also lowered the cash reserve ratio, or the proportion of
deposits that banks set aside, by another 400 basis points to inject Rs 1,60,000 crore into the
system. Through the series of measures, RBI has provided Rs 3,88,000 crore of primary liquidity
to the system.
Banks have, however, refrained from passing on the entire benefits to borrowers and have
reduced lending rates 50 to 200 basis points, with private and foreign banks being reluctant to cut
rates.
As a result of banks’ risk aversion that prompted them to park larger sums of money in
government securities, the flow of resources to the commercial sector from banks and non-banks
fell to Rs 4,98,136 crore between April and February 13, against Rs 6,08,351 crore in the
corresponding period of the last year. On a year-on-year basis, non-food credit growth, which
rose to 29.4 per cent on October 10, decelerated to 19.7 per cent on February 13.