Page 50 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 3: Indian Banking System

Lending Rate: Lending rates can be defined as the ratios fixed by RBI to lend the money to Notes
the customers on the basis of those rates. The higher the rate of lending signifies the
costlier credit to the customers. The lower the rate of lending signifies the credit to the
customers is less which will encourage the customers to borrow funds from the banks
more that will facilitate the flow of more money in the hands of public.
Repo Rate: Repo rate is the rate at which banks borrow funds from the central bank to fill
the gap between the demand they are facing for providing loans to their customers and
how much funds they have on hand to lend.
If the RBI wants to make it more costly for the banks to borrow money, it hikes the repo
rate; similarly, if it wants to make it cheaper for banks to borrow money, it cuts the repo
rate.

Reverse Repo Rate: The rate at which Reserve Bank of India borrows money from the
banks (or banks lend money to the RBI) is termed as the reverse repo rate. The RBI uses this
instrument when it feels there is too much funds floating in the banking industry.

If the reverse repo rate is rising up, it means the RBI will borrow money from the bank and offer
them a lucrative rate of interest. As a result, banks would prefer to keep their money with the
RBI (which is absolutely risk free) in lieu of lending it out (this option comes with a certain
amount of risk) to other customers.

Caselet RBI Cuts Rates after 9-month Wait, Stays Cautious

he Reserve Bank of India (RBI) lowered its key policy rate for the first time in nine
months on Tuesday, but struck a cautious note on further easing as it waits to see
Thow the government’s upcoming budget aims to bring a bloated fiscal deficit
under control.
The RBI cut the policy repo rate by 25 basis points (bps) to 7.75 percent to help support an
economy set to post its slowest annual growth rate in a decade.

The RBI revised its GDP growth forecast for Asia’s third-largest economy to 5.5 percent
from 5.8 percent for the fiscal year ending in March, a sharp come down for an economy
that was running at near double-digit growth before the Lehman Brothers crisis.
Though respectable by other standards, the growth rate is too slow for an economy trying
to support hundreds of millions of poor people, and is a worry for the ruling Congress
party as it heads towards an election next year.
“It is now critical to arrest the loss of growth momentum without endangering external
stability,” the RBI said in its policy review.
But it went on to list constraints, notably worryingly high current account and fiscal
deficits, and the risk that inflation could flare again.

Governor Duvvuri Subbarao told a news conference that if inflation and the current account
deficit moderated by more than expected there would be room to ease monetary policy.
“The message that we are trying to give is that as much as there is some space, it going to
be quite limited, and we are going to use it with a lot of judgment on timing and quantum,”
Subbarao said.

Source: http://in.reuters.com/article/2013/01/29/india-rbi-policy-review-repo-rates-
idINDEE90R0GI20130129

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