SBI: Linking of interest rates to the RBI’s repo rate

Question: Which of the following is/are Policy rates of RBI?
(a) Repo rate & Reverse repo rate
(b) Marginal Standing Facility Rate
(c) Bank Rate
(d) All of the above
Answer: (d)
Related facts:

  • In March, the State Bank of India announced that it will link interest rates for its savings accounts (with balances over Rs. 1 lakh) and short-term loans to the RBI’s repo rate.
  • Repo rate stands for — Re Purchase Option Rate
  • The new rates linked to the external benchmark (repo rate) will come into effect from May 1, 2019.
  • With this, SBI will become the first bank in the country to link deposit accounts and loans of any kind directly to an external benchmark wherein changes in the latter would be auto-transmitted to the former.

Pros and cons:

  • As per the current repo rate, SBI’s savings accounts with over Rs. 1 lakh deposits will (from May 1, 2019) earn less interest than those with smaller balances in their accounts and also 0.75 percent less than 4% being offered on post office savings account.
  • However, it the repo rate goes above 6.25%, then the interest rate for the large SBI savings accounts would be higher than the current 3.5% being earned on smaller accounts, as per the external benchmark formula.

Terms of Conditions:

  • Only savings accounts with deposits above Rs. 1 lakh will be linked to the external benchmark.
  • All cash credit accounts and overdrafts with limits above Rs. 1 lakh will also be linked to the benchmark policy rate, plus a spread of 2.25 percent.

Policy rates:
Policy rates of RBI are as follows–

  • Policy Repo rate : 5.75%
  • Reverse Repo rate : 5.50%
  • Marginal Standing Facility rate : 6.00%
  • Bank rate : 6.00%

Links:
https://economictimes.indiatimes.com/wealth/personal-finance-news/interest-rate-for-sbi-saving-a/cs-with-rs-1-lakh-plus-balance-to-be-linked-to-repo-rate-from-may-1/articleshow/69111909.cms?from=mdr
https://economictimes.indiatimes.com/wealth/personal-finance-news/interest-rate-for-sbi-saving-a/cs-with-rs-1-lakh-plus-balance-to-be-linked-to-repo-rate-from-may-1/articleshow/69111909.cms