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 RBI  INCREASES  BANK  RATE  BY  350 BPS i.e. from 6.00% to 9.50% wef 13/02/2012

 

 

In terms of Section 49 of the RBI Act 1934, the RBI is required to make public (from time to time) the standard rate at which it is ready to buy or re-discount the bills of exchange or other commercial papers eligible for purchase under the said Act.

 

Bank rate is a discount rate and thus technically it should always be more than the Repo Rate.    However, for almost 9 years, RBI had not revised this rate as Bank Rate has not been in use.  During all these years 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.

 

However, now RBI realised that by not adjusting regularly the Bank Rate, it has been creating certain anomalies in the system.  Bank Rate was still being used for arriving at the penal rate charged on banks for shortfalls in meeting their reserve requirements (cash reserve ratio and statutory liquidity ratio).  Moreover, the Bank Rate continued to be used by several other organisations as a reference rate for indexation purposes. 

 

Therefore,  Reserve Bank consulted various organizations/stakeholders relying on the Bank Rate as a reference rate, and based on the feedback received, it i decided  that the Bank Rate should normally stay aligned to the MSF rate. Accordingly, it has been decided that with effect from the close of business today (February 13, 2012), the Bank Rate will stand increased by 350 basis points, i.e., from 6.00 per cent per annum to 9.50 per cent per annum. 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.

 

All penal interest rates on shortfall in reserve requirements, which are specifically linked to the Bank Rate, will also stand revised