RBI Credit Policy: Key takeaways

In line with market expectations, the Reserve Bank of India on Tuesday kept key rates unchanged. While the repo rate was maintained at 8% and reverse repo rate at 7%, the SLR was cut by 50 basis points.

Rajan kept the policy rate unchanged at 8 per cent at the previous review on April 1 as inflation, especially of food items, hovered at over 8 per cent. Food inflation in April stood at 9.66 per cent and retail inflation at 8.59 per cent.

Here are key takeaways from the RBI's credit policy

Reduces mandatory government bond holdings 25 basis points

Cuts export credit refinance to 32% of eligible export credit from 50%

Special term repo of 25 basis points to offset export credit cut

Price pressures to remain in May, but seasonal

If economy stays on course, no need for interest rate hike

To allow domestic funds in currency derivatives

Lifts individual USD remittance abroad to $125,000 vs $75,000

Allows all residents and non-residents except citizens of Pakistan and Bangladesh to take out Indian currency notes up to Rs. 25,000 while leaving the country.

RBI credit policy: What these banking terms mean

In its efforts to keep inflation under check and spur economic growth, the RBI has a quiver full of arrows that it uses to control the flow of money into the economy: Demystifying banking jargon:

1. Bank rate is the rate at which RBI lends to commercial banks. This influences the interest rates commercial banks charge their customers. Pegged at 9 per cent currently, a change in the bank rate has a trickle-down effect. A higher bank rate will mean commercial banks will increase lending rates, affecting your installments and the interest rates your deposits fetch.

2. The cash reserve ratio stipulates the minimum proportion of deposits that banks must hold with the central bank. When the RBI increases the CRR, banks have fewer funds to lend or invest since they have to park more money with the central bank, helping it control liquidity in an economy. If liquidity decreases, there is less money available, and that helps bring down inflation.

3. Statutory liquidity ratio defines the minimum proportion of their deposits that banks have to maintain at the close of business every day as liquid assets, such as cash or gold. A higher SLR restricts a bank’s ability to infuse more money into the economy, reining in inflation.

4. Repo rate is the rate the central bank charges to lend to banks against securities. If banks have to pay more to borrow money, they may increase the rates they charge their customers or may borrow less, thus reducing inflation.

5. Reverse repo rate is the rate at which the RBI borrows money from banks. So if the RBI hikes the reverse repo rate, banks will be happy to keep more funds with the RBI since they get a higher rate of return. Consequently, they will have less money to lend.