MUMBAI: RBI Governor Raghuram Rajan kept his promise of moving the money market to normal conditions as he cut the penal rate of interest, and took a step towards expanding financial markets by agreeing to lend to banks for a longer term.
The central bank reduced the rate under the marginal standing facility (MSF) by 50 basis points to 9%, and introduced lending to banks for seven days and 14 days, instead of the current practice of just a day. The longer-tenor lending will begin October 11 at rates based on bids by banks. A basis point is 0.01 percentage point.
The measures are an unwinding of the liquidity tightening that began in July to fight a currency slide that took the rupee to a record low of 68.84 to the US dollar. The governor, who raised the repo rate last month, may keep interest rates high, or even raise them to show his determination to curb rising prices. The repo rate is the one at which RBI lends to banks.
