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RBI’s Rajan Increased Repo, Drops MSF, Increases Term Repo Limit


Rajan has , in his first “real” policy, increased the repo rate by 0.25% to 7.75% and cut the MSF rate by 0.25% to 8.75%. Reverse repo goes to 6.75%.

Note: Repo is where banks borrow overnight from RBI, currently limited to 0.5% of all deposits. Reverse repo is where banks will park excess cash with RBI. MSF is the Marginal Standing Facility which is like Repo, but can be beyond the 0.5% limit and is at a higher rate.

To read more, see Cash Reserve and Liquidity Ratios: A Primer.

Effectively this reduces the “corridor” between the Repo and MSF to 1%. This was always at 1%, but was increased to 3% in July to contain rupee volatility.

Term Repo is now up to 0.5% of NDTL

The new term repo of 7 and 14 days each, introduced in early October on a variable (auctioned) interest rate, will now be extended to 0.5% of NDTL. Think of NDTL as sum of all deposits (term, savings, current etc.)

This gives term liquidity of 7 to 14 days for Rs. 40,000 cr. (400 billion) which might be a small relief as the rates tend to be close to the MSF rates. I believe this is the correct mechanism – to have market bids for the repo rather than have a fixed rate, though a fixed rate can be “targeted”.

Foreign Banks can set up subsidiaries

Instead of operating as branches of offshore entities, foreign banks will soon be able to set up fully owned subsidiaries for Indian operations.

CPI Indexed Bonds

The WPI indexed bonds have been a failure. Down 16% from the start, they have failed to behave as either a predictor of inflation expectations or as a financial instrument to tackle real inflation, which was way above the WPI levels expected.

The CPI that’s inflating at more than 9% is a better indicator of inflation, but again it’s the medium of distribution and the friction people face when buying fin products that will make a difference. Can it be bought online, or just via a form? Does it need more complicated KYC? We’ll have to see.

MSF moves to End-of-Day

The Marginal Standing Facility which is at around 5pm right now will be moved to 7pm to 7:30pm. The idea is that it has to be after RTGS and NEFT are closed (which is when you can know your cash requirements).

General Credit Card scheme for small entrepreneurs

The GCC scheme, allowed earlier for farm and rural entrepreneurs will be expanded to include non-farm as well. The guidelines come later, and as always, the details will have the devil in them.


  • Repo for Mutual funds (which gave banks an additional 0.5% of NDTL to borrow in MSF) has been discontinued. No one ever used it.
  • Cash might be possible to take from Prepaid instruments. Great idea, but I’ll wait for the implementation. Imagine cashing out your Shopper’s Stop voucher! (But wait, don’t.)


Short term funding rates have gone down. T-Bills are now at 8.5% to 8.6% from 9% last week. That is a huge boost for ultra-short-term and liquid mutual funds, whose NAV will go up.

With liquidity now likely to be ample through a lower MSF and higher limits for term-repo, we are likely to see banks move to the next problem in the queue: defaults.

Banks might increase deposit and lending rates, but it’s more likely they accept lower margins so as to not impact the system.

What hasn’t been said: OMC Swap withdrawal or FCNR swap changes. We ignore these at our peril, but the governor is likely to make intermediate statements about them (doesn’t have to wait for policy).

The Dollar is more or less steady at 61.5. This isn’t going to be hugely impacted by this policy.

More to come when we hear what the governor had to say in his post-policy speeches.


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