Measures announced by RBI for strengthening the economy
Part of: GS-Prelims and GS-III – Economy
- RBI announced another set of measures for strengthening the economy recently.
- 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:
- 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.
- 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.