The Reserve Bank of
India today cut the repo rate by 25 basis points from 7.75% to 7.50% with
immediate effect ahead of its seventh bi-monthly policy review on April 7,
2015. One basis point is
one-hundredth of a percentage point.

The RBI had lowered interest rates by 25 bps on Jan 15. Both rate cuts this year were outside of the central bank’s scheduled policy review meetings.This is the second repo rate cut since May 2013.

Consequently, the
reverse repo rate under the LAF (Liquidity Adjustment Facility) stands adjusted
to 6.50 per cent, and the marginal standing facility (MSF) rate and the Bank
Rate to 8.50 per cent with immediate effect. There has been no change in the
Cash Reserve Ratio (CRR) 4 per cent.

The cut in the
policy rate by RBI will help in lowering interest rate for individual and
corporate borrowers and make home loan and corporate loans cheaper.

Note: On February 3, 2015,
RBI, in its sixth bi-monthly monetary policy statement, keep interest rates
(Repo Rate) unchanged but reduced Statutory Liquidity Ratio (SLR) by 50 basis
points to 21.5% from 22%.

 What is Repo Rate?

Ans – – It is the rate at
which RBI lends money to the commercial banks in the event of any shortfall of
funds.

Note: i. Repo rate is used by
monetary authorities to control inflation.

ii. REPO rate is the
rate of interest which RBI implements on the short term loans, i.e., from a
period ranging between 2 days to 3 months (90 Days

What happens when
RBI increase or reduce Repo Rate?

Ans – When the repo rate
increases, borrowing from the RBI becomes more expensive.

Note: The increase
in repo rates would mean that the RBI would charge a higher rate of interest
for all money given out to various commercial banks.

ii. The bank in
turn would be forced to charge its customers a higher rate of interest when it
comes to home and auto loans to balance the higher interest rate.

Reduction in Repo
rate means: A
reduction in the repo rate will help banks to get money at a cheaper rate.

The bank in turn
charges its customers a low rate of interest when it comes to home and auto
loans.

So, while on the one
hand, inflation is under controlled as there is less money to spend, growth
suffers as companies avoid taking loans at high rates, leading to a shortfall
in production and expansion.

Current Rates are as
follows:

1. Repo Rate – 7.50% (Changed)

2. Reverse Repo Rate
– 6.50% (Changed)

3. CRR (Cash Reserve
ratio) – 4% (Unchanged)

4. Bank Rate – 8.50%
(Changed)

5. MSF (Marginal
Standing Facility) – 8.50% (Changed)

6. SLR (Statutory
Liquidity Ratio) – 21.5% (Unchanged)