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.
