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Measures announced by RBI for strengthening the economy 

  • IASbaba
  • May 23, 2020
  • 0
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Measures announced by RBI for strengthening the economy 

Part of: GS-Prelims and GS-III – Economy

In News:

  • RBI announced another set of measures for strengthening the economy recently. 

Key takeaways 

  • Repo rate: It is reduced from 4.4% to 4.0%. 
  • Marginal Standing Facility rate & Bank rate: Reduced from 4.65% to 4.25%. 
  • Reverse repo rate: Reduced from 3.75% to 3.35%.
  • States have been allowed to borrow more from the Consolidated Sinking Fund. It is being maintained by state governments as a buffer for repayment of their liabilities.
  • The RBI had announced a special refinance facility of ₹15,000 crore to SIDBI at RBI’s policy repo rate for a period of 90 days. This facility has now been extended by another 90 days.
  • A line of credit of ₹15,000 crore will be given to the EXIM Bank, for financing India’s foreign trade. 
  • The loan facility has been given for a period of 90 days, with a provision to extend it by one year.
  • The maximum credit which banks can extend to a particular corporate group has been increased from 25% to 30% of the bank’s eligible capital base.

Important value additions:

Repo rate 

  • It is also known as the benchmark interest rate. 
  • It is the rate at which the RBI lends money to the banks for a short term. 
  • When the repo rate increases, borrowing from RBI becomes more expensive.

Marginal Standing Facility (MSF) rate 

  • It refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities. 
  • MSF is a very short term borrowing scheme for scheduled commercial banks.

Bank rate 

  • It is the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans. 
  • Managing the bank rate is a method by which central banks affect economic activity.

Reverse repo rate 

  • It is the rate at which the RBI borrows money from commercial banks within the country. 
  • It is a monetary policy instrument which can be used to control the money supply in the country.

Consolidated Sinking Fund (CSF) 

  • CSF was set up in 1999-2000 by the RBI to meet redemption of market loans of the States. 
  • Initially, 11 States — Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa, Maharashtra, Meghalaya, Mizoram, Tripura, Uttaranchal and West Bengal — set up sinking funds. 
  • Later, the 12th Finance Commission (2005-10) recommended that all States should have sinking funds for amortisation of all loans, including loans from banks, liabilities on account of NSSF National Small Saving Fund), etc. 
  • The fund should be maintained outside the consolidated fund of the States and the public account. 
  • It should not be used for any other purpose, except for redemption of loans.
  • As per the scheme, State governments could contribute 1-3% of the outstanding market loans each year to the Fund. 
  • The Fund is administered by the Central Accounts Section of RBI Nagpur. 

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