A

COMPREHENSIVE PROJECT REPORT

ON
[IMPACT OF REPO RATE ON BANK LENDING IN INDIA]
Submitted to

[SHREE.H.N. SHUKLA COLLEGE MANAGEMENT STAUDIES]

In partial fulfillment of the
Requirement of the award for the degree of
Master of business administration

Gujarat Technological University

UNDER THE GUIDANCE OF

SUBMITTED BY
(VISHVAKARMA JITENDRA K.)
[Enrollment No.:167590592092]
(ZAPDIYA SAGAR S.)
[Enrollment No.:167590592096]
MBA SEMESTER III/IV
(SHREE H.N. SHUKLA COLLEGE MANAGEMENT STUDIES)

MBA PROGRAMME
Affiliated to Gujarat Technological University
Ahmadabad
Year 2016-2018
 PREFACE

This project provides an opportunity to demonstrate application of our knowledge, skill and
competencies required during the financial session. This project helps us to devote our skill to
analyze the problem to suggest alternative solutions and to evaluate them. We have worked on
the topic is “IMPACT OF REPO RATE ON BANK LEADING” We have put our level best
to prepare our project an error free project every effort has been made to offer the most
authenticate position with accuracy.

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 ACKNOWLEDGEMENT

We would like to express our profound gratitude to all those who have been instrumental in the
preparation of this report which has been prepared in partial fulfillment of Comprehensive
Project in the Semester III/ IV of an MBA program.
We wish to thank Dr. Mehul Rupani, director of H.N. SHUKLA Institute of Management and all
the Faculty members of SHREE H.N. SHUKLA MANAGEMENT STUDIES for their support
and vision.
This project could only be completed with the assistance of Ms. Jay Goswami having being a
valued guide.
Finally, we would like to thank our Parents, Family, Friends and God almighty for their
unending inspiration and encouragement.

Place: Rajkot (Gujarat)

Date:

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 DECLARATION

We, VISHVAKARMA JITENDRA & ZAPDIYA SAGAR hereby declare that the report for
“Comprehensive Project” entitled “IMPACT OF REPO RATE ON BANK LEADING” is the
result of our own work and our ineptness to other work publications, references, if any, have
been duly acknowledged.

Place: Rajkot Signature

Date: Vishwakarma Jitendra

Signature
Zapdiya Sagar

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 EXECUTIVE SUMMERY

Changes in Repo rate affect the cost of borrowing of Bank, which shows that RBI plays a very
important role in supply of money in the market. This paper examines the recently impact of
raise repo rate on banking leading from the period of September –till now, it explains what is the
scenario of leading behavior towards personal loan and corporate loan. I have done recent
theoretical and empirical work that relates to the “Leading” channel of monetary policy
transmission and monetary policy and long-term real rates. Investigate the efficiency level of
repo rate among the all monetary tools. This study to find out at what level the impact repo on
deposit and loan, what should be investment strategy of general public towards changes in it.
Inflation beyond there should level make growth costly and calls for policy change. As a result
of increasing rate for control inflation, the cost of borrowing has been higher.

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 TABLE OF CONTENT
SR.NO PARTICULAR PAGE NO
1 INTRODUCTION
 BACKGROUND OF STUDY 7
 IMPACT OF REPO RATE 8
2 LEADING VIEWS
 CONCEPT OF LENDING IN INDIA 9
 SOURCES OF FUND 11
 LENDING SEGMENT OF BANK 17
 KEY DRIVER IN LENDING RATES 23
 INDIAN PRIME LENDING RATE 26
3 REPO POLICY
 MONETARY POLICY 27
 MONETARY INSTRUMENT 29
 INFLATION VS INTEREST RATE 32
4 LITERATURE REVIEWS 35
5 RESEARCH METHODOLOGY
 PROBLEMS OF STUDY
 OBJECTIVE OF STUDY 37

 IMPORTANCE OF STUDY
 LIMITATION

6 ANALYSIS AND INTERPRETATION 38

7 BANKING SECTOR IN INDIA 39
 BANKING STRUCTURE IN INDIA 40
 MAJOR PLAYERS OF BANKING INDUSTRY 41
8 CONCLUSION 52
9 SUGGESTION 53
10 REFERENCE 54

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 INTRODUCTION

BACKGROUND OF STUDY
The inflation is continuously increasing which are the bad for Indian economy. Goal of Indian
government is growth that is likely to lose the quantum in Q3 of 2013-2014, with industrial
activity in contractionary mode, mainly on account of manufacturing.

The current account deficit for 2013-2014 is now expected to be below 2.5 percentage of GDP as
compared with 4.8 percent in 2012-2013. Reserves have been rebuilt since September, and are
expected to increase. And Oil Company is buying foreign exchange for paying to RBI.

Retail inflation, as measured by the consumer price index, eased to a two-year low of 8.10% in
February from 8.79% in January, having touched a high of 11.24% in November. Inflation based
on the wholesale price index fell and fuel to nine-month low of 4.68% in February on the back of
drop-in food and fuel prices, having been at 5.05% in January. But data form Barclay‟s shows
inflationary expectation is running at 12% the highest in recent memory.
The hailstorm is likely to result in an estimated crop failure of about Rs 12,000 Crore (0.1% of
the full year GDP) and his could reverse the recent downtrend in retail price inflation.
Monetary authorities may also wait for singles form the new government that will present a full
budget once it takes office in may how quickly rate cuts may begin will also depend a lot on low
efficient the new government will be in managing its finances.
Although the continued tapering of bond purchases by the Federal reserve‟s is having little
impact on India, international factors such as Ukraine, or a shakeup in the US markets could
adversely could affects the outlook on rates.

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IMPACT OF REPO RATE
We all Indian read and watch in newspaper changes Repo rate and other monetary instrument.
Debt markets affected by the changes in “repo rate and reverse repo rate “Bank decided
their leading rates on the basis of change in Repo rate by 25 bps to 8% in January 2014 credit
policy.
This is the third time that Governor of RBI. Rajan has raised rates after taking over as governor
in September 2013 last year an increase of 75% basis point from 7.25% to 8% in four months.
The months. The move is unlikely to have an impact on rates charged by banks.
In a surprise move. The Reverse bank of India release its third quarter monetary policy increased
the short term leading rate of repo rate to 8 per cent from the existing 7.75 per cent. This move
see ad a surprise to most financial experts as it was announced despite the lower inflation rate
released in December. While RBI justified the revision saying it is an essential option to bring
down retail inflation in point vies of business leaders, this move is disappointing
Let us take a look at how RBI‟s repo rate policy impact loans, fixed deposits and other areas of
life for the common man.
Before getting into the reasons why the increase in repo rate may be bad news for the common
man with increased loan EMIs, it is essential to understand what repo rates are and how they
impact the banking system. In a layman‟s term, Repo rate is the rate which the Reverse Bank of
India lends money to commercial banks. The increase in repo rates for 7.7% to 8% would mean
that the RBI would change a higher rate of interest for all money given out of various
commercial banks. The bank in turn would be forced to charge its customers a higher rate of
interest when it comes to home and auto loans to offset the higher interest rate.

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IMPACT ON DEPOSIT AND LENDING RATES:
Most financial experts are of the opinion that the immediate impact of the increase in repo rates
may not necessarily get translated into higher deposits and lending rates offered by the banks.
The banks already fighting a weak loan growth rate due to a sluggish real estate sector are
unlikely to pass on the increased rates to the customer immediately. Depending on the liquidity
condition of the banks, the changes interest and deposit rates may be passed on once banks
analyze their cost of funds over next few days.

INCREASE EMIS:
Once the banks analyze their cost of funds and their overall liquidity condition, the higher
interest rates would have to be passed on to the end user or the retail customer. This would
effectively mean higher EMIs on home loans, auto loans as well as personal loans.
The Home loan segment is likely to face the brunt of his increase in repo rate. Financial experts
believe that since the car loan market is dominated by various schemes, financers are likely to
absorb the rate hike by increasing discount offers. Majority of car loans are on fixed rate basis
compared to home loans with majority offered on floating rate basis. Any rates impact due to the
repo rate increase would not necessarily impact the auto loan market as much as it would impact
the home loan segment. Real estate companies and developers already facing the brunt of
sluggish sales are disappointed with this rate hike as it is likely to dampen interest in the real
estate segment.

IMPACT ON LOANS:
The question as to whether banks would actually increase the lending rates amid the hike in repo
rates remains an open one. Once done with analyzing their costs of funds and banks liquidity
conditions, the banks would have no option but to increase their interest rates.
For example, assuming the interest rate on a 20-year housing loan of Rs 75 Lakh is increase from
11 to 11.25 %,(EMI 77,414on 11 % and 78,694 on 11.25 %) it will translate into an increase of
approximately Rs 1280 per month in EMI

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IMPACT ON FIXED DEPOSITS:
The Reserve Bank of India has recently cut repo rates post demonetization. The rate cut does
influence interest rates on fixed deposits. Lower repo rates (rates at which banks borrow money
from the Reserve Bank of India) translate into a direct impact on cost of funds for banks. As a
result, whenever there is excess liquidity, banks cut the deposit rates. This has a direct impact on
those investors and depositors who depend on assured investments like fixed deposits. After
demonetization, most big lenders have cut their FD rates by up to 0.25% post a huge increase in
deposits.
The short-term impact of such a hike is does not augur well for investors parking their money in
fixed deposits. Being an election year, the banks may reduce retail deposit rates only slightly for
below one-year fixed deposits simply to keep their margins intact. The long-term policy of the
RBI is now aimed at fighting retail inflation. Once the inflation rates are substantially lowered,
the prospect of investing in fixed deposit over the long term offers lucrative gains. The
immediate impact on small fixed deposits may be a damper but banks are unlikely to lower
interest rates across the board as of now giving relief to a vast section of fixed deposit account
holders.

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LENDING VIEWS IN INDIA:
Banks make generally commercial loans designed to meet the specific needs of a borrower. They
also make standardized loans as in the case of mortgage and credit card loans which can be
packaged into securitized loans and sold in pools in the secondary markets. Banks which are
uniquely qualified to make, monitor and collect commercial loans as well as standardized loans
however face competition from insurance companies. Unit trust and non-bank finance
companies.
Borrower‟s especially large corporate also have choice to raise funds directly in the primary
market by issue of share and debentures and public fixed deposits and in the money market
through issues of commercial paper. The competition from other types of lenders and direct
financing by prospective borrowers has reduced the profitability of banks, to offset lower profit
banks abroad have shifted some of their loans to higher yielding and higher risk real estate loans
and loans to emerging countries. The crash in real estate values and large-scale defaults on LDCs
debt in 1980s and 1990s has highlighted the tradeoff between risk and return.

SOURCES OF BANKING FUND

The money that a bank raises to lend is often called the capital. So how does banks raise capital
is something that has to be understood in his background. Banks have to raise money from
sources in order to have it with them to be lent to customers. From whom they charge a rate of
interest that is higher than at which they borrow. This accounts for their profit. Since capital is
one of the critical
Components of a banking business, it is important to understand where all and how to banks
raise capital.
As mentioned before, banks basically make money by lending money at rates higher than the
cost of the money they lend. More specifically, banks collect interest on loans and interest
payment from the debt securities they own, and pay interest on deposits CDs, and short-term
borrowings. The difference is known as the “spread” or the net interest income and when that net
interest income is divided by the bank‟s earning assets; it is known as the net interest margin.

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DEPOSITS
The largest sources by far of funds for banks are deposits; money that accounts holders entrusts
to the banks for safekeeping and use in future transactions, as well as modest amounts of interest.
Generally referred to as “core deposits” these are typically the checking and saving accounts that
so many people currently have.
In most cases, these deposits have very short terms. While people will typically maintain
accounts for years at a time with a particular bank, the customer reserves the right to withdraw
the full amount at any time customer have the options to withdraw money upon demand and the
balances are fully insured, up to $250,000 therefore, banks do not have to pay much for this
money. Many banks pay no interest at all on checking account balances, or at least pay very
little, and pay interest rates for saving account that is well below U.S. Treasury bond rates.

WHOLESALE DEPOSITS
If a bank cannot attract a sufficient level of core deposits, that bank can turn to wholesales
sources of funds. In many respects these wholesale funds are much like interbank CDs. There is
nothing necessarily wrong with wholesales funds. But investor should consider what it says
about a bank when it relies on these funding sources. While some banks de-emphasize the
branch- based deposit gathering model, in favor of wholesales funding heavy reliance on this
source of capital can be a warning that a bank is not as competitive as its peers.
Investor should also note that the higher cost of wholesale funding means that a bank either has
to settle for a narrower interest spread and lower profits, or pursue higher yield from its lending
and investing, which usually means taking on greater risk.

SHARE EQUITY
While deposits are the primary sources of loan able funds for almost every bank. Shareholder
equity is an important part of a bank„s capital. Several important regulatory ratios are based upon
the amount of shareholder capital a bank has and disappear.
Common equity is straight forward. This is capital that the bank has raised by selling shares to
outside investors. While banks, especially larger banks, do often pay dividend on their common
shares, there is no requirement for them to do so.

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Banks often issue preferred shares to raise capital. As this capital is expensive and generally
issued only in times of trouble, or to facilitate an acquisition, banks will often make these shares
callable. This gives the bank the right to buy back the shares at a time when the capital position
is stronger and the bank no longer needs.
Equity capital is expensive, therefore banks generally only issue share when they need to raise
funds for an acquisition or when they need to repair their capital position, typically after a period
of elevated bad loans. Apart from the initial capital raised to fund a new bank, banks do not
typically issue equity in order to fund loans.

DEBT
Banks will also raise capital through debt issuance. Banks most often use debt to smooth out the
ups and downs in their funding needs, and will call upon sources like repurchasing agreements or
Repo market, to access debt funding on a short-term basis.
There is frankly nothing particularly unusual about bank -issued debt, and like regular
corporation‟s banks may be callable and/or convertible. Although debt is relatively common on
bank balance sheets. It is not a critical source of capital for most banks. Although debt/equity
ratios are typically over 100% I the banking sector. This is largely a function of the relatively
low level of equity at most banks. Seen differently, debt is usually a much smaller percentage of
total deposits or loans most banks and is accordingly, not a vital source of loan able funds.

USE OF FUNDS

LOANS
For most banks, loans are the primary use of their funds and the principal way in which they earn
income. Loans are typically made for fixed terms, at fixed rates and are typically secured with
real property often the property that the loan is going to be used to purchase. While banks will
make loans with variable or adjustable interest rates and borrowers can often repay loans early,
with little or no penalty, banks generally shy away from these kinds of loans, as it can be difficult
part and parcel of a bank‟s lending practices is its evaluation. When considering a loan. Banks
will often evaluate the income, assets and debt of the prospective borrower, as well as the credit
history of the borrower. The purchase of the loan is also a factor in the loan underwriting

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decision loans taken out to purchase real property such as homes, car, inventory etc. are
generally considered less risky as there is an underlying asset of some value that bank can
reclaim in the event of nonpayment.
As such, banks play an under-appreciated role in the economy. To some extent, bank loan
officers decide which project, and /or businesses, are worth purchasing and are deserving of
capital.

CONSUMER LENDING

Consumer lending grew at a higher rate in 2013 than in 2012 and in 2011. This was despite
negative economics sentiment in terms of low growth, high inflation and high interest rates. The
high growth was partly due to smart positioning of products by banks such as pushing credit
cards, housing loans and auto loans to self-employed individuals and partly it was because the
impact of recession was less on individuals compared to the corporate segment. Not only growth
was less on 2013, but bad assets were also on the lower side than in previous years.

SENTIMENT REMAINED NEGATIVE IN INDIA ECONOMY IN 2013

The overall sentiment remained negative in the Indian economy through 2013. The growth in
gross domestic‟s product was a fraction of its peak level in 2007. Inflation continued to remain
high in certain pockets, as the price of vegetables soared. The Indian rupee depreciated
significantly throughout the year. Reserve Bank of India the apex body did not find conditions
conducive to cutting key rates. In the absence of rate cuts, banks were not in a position to cut

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lending rates, which was considered important to boost credit growth. The only silver lining was
that the retail side of lending performed better than the corporate side giving breathing space to
all financial institutions

SCHEDULEDCOMMERCIAL BANKS CONTINUE TOLEAD CONSUMER

LENDING IN 2013

Banks such as State Bank of India, Punjab National Bank, ICICI Banks Ltd. HDFC bank Ltd.
Bank of India, Bank of Baroda and Axis Bank Ltd continued to dominate consumer lending in
2013. These entities fall under schedule commercial banks (SCBs). The reason that these entities
dominated was their decade‟s long experience in the Indian market, huge capital bases and was
their networks. Apart from banks, several Non- Banking financial companies (NBFCs) were also
a part of consumer lending, such entities were smaller in scale than banks because they could not
raise money through saving and current deposits, NBFCs had to raise money from money
markets and therefore they operate on a much smaller scale than banks. Apart from NBFCs,
several microfinance institutions (MFIs) also operated in this business SCBs, NBFCs, and MFIs
continued to attempt to reduce the share of informal money lenders in 2013.

CARD LEADING WITNESS FASTEST GROWTH IN 2013

Credit card outstanding balance witnessed the fastest growth in 2013. This was because retail
banking consumer continued to report significant growth in disposable incomes. Based on this,
banks felt assured of their creditworthiness and focused more on credit cards in 2012 and 2013.
Banks realized that the slowdown affected the corporate segment more than retail consumers.
This was because a population continued to post growth in their income and bankers realized
their continued creditworthiness. Therefore, banks targeted such individuals to grow their credit
card portfolios.

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CONSUMER LENDING EXPECTED TO POST STRONG GROWTH
OVER THE FORECAST PERIOD

Consumer lending is expected to see continued strong growth in outstanding balance in constant
value terms over the forecast period. This will be due to rising disposable incomes, the growth of
banks and other financial institutions and increasing financial inclusion. More consumers will
come under the ambit of organized means of financing, rather than informal money lenders, who
generally change exorbitant rates of interest.

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 IMPACT OF REPO ON LEADING SEGMENT
AMOUNT IN (RUPEES) CRORES

Date Rep Borrowi Balances Investment in Bank Food Nonfood

o ng from with government credit credit credit
rate RBI reserve and other
bank approved
security
01/10/2016 6.25 414.28 3205.14 22255.25 57718.22 1137.08 56581.64
01/24/2016 6.25 298.04 3233.33 22107.91 57757.35 1117.74 56639.61
02/07/2016 6.25 406.39 3151.89 22308.84 58458.33 1107.09 57248.39
02/21/2016 6.25 311.04 3120.05 22374.97 59372.49 1065.67 57392.66
03/07/2016 6.25 416.13 3216.77 22216.53 60130.85 1000.30 58372.19
03/21/2016 6.25 371.88 3163.44 22715.64 60868.81 984.77 59146.08
04/18/2016 6.25 318.69 3265.44 22726.38 60360.83 896.13 59972.68

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 TYPES OF LOANS
AUTO LOAN
Most of the banks provide car loans. Car loan also termed as Auto Loan. One can get car loan up
to 85% of ex-showroom price of the car with some amount of processing fee.

EDUCATION LOAN
Hiking the key policy rate today will hit property sales, particularly in the residential segment,
real estate developers, raised the key policy rate by 0.25 percent to 8 percent in a bid to curb
inflation, a move that may translate in to higher EMIs and push up the cost of borrowing for the
corporate, there is already a slowdown in the property market and the overall economy. So, there
would not be much adverse impact on sales make corporate and retail loan more expensive. It
may increase EMI burden on common man.

PERSONAL LOAN
Credit costs are lower in segments such as home loans, which are secured loans rates might be
seen in segments such as personal loans, which were riskier than home loans. The fact than most
banks were consciously going slow on credit growth owing asset quality concerns, was another
reason why arise in lending rates was unlikely at this point.

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 IMPACT OF REPO ON BANK’S LOAN SEGMENT

AMOUNT IN CRORE (RUPEES)

Date Repo rates Personal Housing Vehicle Loan Education
Loans Loan Loan
02/06/2015 7.25% 10,159.34 2,984.51 1,285.26 571.30
29/09/2015 6.75% 10,091.32 2,974.58 1,274.37 570.48
05/04/2016 6.50% 9,989.87 2,952.49 1,261.46 567.90
04/10/2016 6.25% 9,843.87 2,945.91 1,240.36 564.74
07/12/2016 6.25% 9,702.01 2,922.66 1,202.32 558.04
08/02/2017 6.25% 9,652.79 2,888.38 1,174.09 550.73
06/04/2017 6.25% 9,423.13 2,873.54 1,167.62 544.76
08/06/2017 6.25% 9,347.73 2,865.71 1,167.05 534.11
02/07/2017 6.00% 9,272.94 2,833.56 1.167.02 530.97

IMPACT ON REPO RATE

1600000.00%
1400000.00%
1200000.00%
1000000.00%
800000.00%
600000.00%
400000.00%
200000.00%
0.00%

Repo rates Personal Loans Housing Loan Vehicle Loan Education Loan

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DEPOSIT RATES
In rate 2015 to 2017 many quarters, deposit rates have changes continuously to above duration
period. Because of the reason is deposit rates are linked to the rate of inflation. You should
which trends in inflation and deposits, which impact the cost of fund and lending rates.
While there is a need to retain deposit rates at these levels due to the high inflation, banks also
need to see if the increase can be passed on to borrowers. But credit demand has not started
picking up so, if banks raise deposit rates the cost will have to be absorbed. Each bank‟s asset
liability management committee will meet and take a decision on whether to raise rates on not.

Through return to depositors were negative because of the high inflation, banks were unlikely to
raise deposit rates as that would their margins.

REASONS:
 Banks are comfortable on the liquidity front most have already made provisions to
addressed asset quality issues
 There is no immediate requirement for funds it is unlikely they will raise deposit rate
immediately.
TYPES OF DEPOSITS:
1.0 Demand deposits
 Saving account deposit
 Current account deposits
2.0 Term Deposits
3.0 Hybrid Deposits/ Flexi Deposits
4.0 Non – Residence Account
 Foreign Currency Non-Resident Account (FCNR)
 Non-Resident Ordinary Account (NRO)
 Non-Resident External Rupees Account (NRE)

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IMPACT OF REPO RATE ON DEMAND DEPOSIT AND TIME DEPOSIT
(AMOUNT IN CRORE RS.)
Date Repo Rates Demand deposit Time deposit
18/04/2016 6.25% 7265.94 71433.72
04/04/2016 6.25% 7677.41 71633.63
21/03/2016 6.25% 7208.00 70185.85
07/03/2016 6.25% 7031.62 69891.5
21/02/2016 6.25% 6878.38 68887.71
07/02/2016 6.25% 6792.05 68921.38
24/01/2016 6.25% 6892.04 68353.06
10/01/2016 6.25% 6662.5 68565.79

8000000.00% Time
deposit, 68565.7
7000000.00% 9
6000000.00%
5000000.00%
4000000.00%
Demand
3000000.00% deposit, 6662.5
2000000.00%
Repo
1000000.00%
Rates, 6.25%
0.00%

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Loan Rate and Deposit Rate.
 The repo rate cut is unlikely to have any impact on the lending and deposit rates
immediately, say bankers as well as analysts. Says Clyton Fernandes, analyst Anand Rathi
Financial Services Ltd. „‟ bankers are not expected to pass on the repo rate cut benefit
immediately as liquidity is still tight
 RBI will have to fist improve. Liquidity in the markets and only then will the benefits be
passed to the consumers. Banks were earlier borrowing Rs 1 Trillion, now it has come down
to Rs. 85,000 Crore. Borrowing is expected to turn positive in the open market. If this
happens banks will lower the lending rate. However this will take at least six months‟‟
 Agrees Abhishek Kothari, research analyst, Violet Arch Security Pvt. Ltd. „‟there are two
reasons for no immediate impact tight liquidity and higher cost of funding for banks. Only
when cost of funding comes down the lending rate. However this will take at least six
months‟‟
 Inflation has a major impact on deposit rates. With inflation at high levels the real rate of
return will be close to negative. Hence deposit rates will be subdued. Says Fernandes, „‟we
expect inflation to be at 5% by March 2015. As long be inflation is high deposit rates will
remain where they are in case of a rate cut, first lending rates will fall and then deposit rates
will come down‟‟
So what about loan customers? Says Surya Bhatia, Managing partner, Asset Managers, „‟
Lending and deposit rate will not come down immediately but whenever it happens there will
not be big drop in deposit rates. In case of fall in lending rates, floating rate consumer will
benefit while those on fixed rate will miss out.‟‟ Planners also advise caution, says Suresh
sadagopan , „‟Lock in your fixed deposits at current level even through rate will not come

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 down immediately overall we know that rate are falling and hence , after a period of time
deposit rates may fall.‟‟
Overall the credit policy was largely a non-event. While markets would once again look out
for Government action and global cues. If you were looking for lowering your loan
installments, you would be disappointed as there is no change expected in loan or deposit
rates.

[ key driver of fluctuation in leading rates]

 The rate of interest in general is the price we pay for borrowing money. It is the price that
the lender charges for taking the risk and investing in the money market. It you borrow /
take a loan from the bank for personal requirement like buying a house or car or starting a
business, you will have to pay interest to the bank on your loan. If you deposit money in a
bank in the from saving or fixed or recurring deposits, the bank pays you interest for the
use of your money.
 Banks use a formula to calculate the interest amount you will have to pay the standard
formula for computing simple interest is principle x time. If you borrow Rs. 10000 at an
annual interest rate of 6% for a period of 1 year, the interest amount you will be Rs. 600.
10000 (Principle balance) x 0.005
(Monthly interest rate) x 12 (No. of months)
The monthly interest rate is calculated as follows the decimal equivalent of 6% is 0.06
0.06 is divided by 12 equal„s which is 0.005.
So the total amount you pay back to the bank at the end of the year would be Rs. 10600
(Principle amount + Interest)
This is simple interest when the principle is paid all together at the end of the loan period.
This interest rate and the amount of total interest paid are usually higher when the loan is
paid in installment in the form of EMI (Equal monthly installment).

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AMORTIZATION
 The Gradual reduction of the Loan balance through regular interest and principle
payments is called “AMORTIZATION”
The bank uses an amortization calculator to determine the amount of monthly payments,
so that cash payment is the same amount.

INTEREST ON SAVING ACCOUNT AND OTHER DEPOSITS IN BANK

 Compound interest is paid on our deposits with the bank. Interest on such deposits is
calculated using the same formula (as the simple interest). But it is done according to a
“compounding” schedule, which can be daily. Monthly, Quarterly OR Annual 1 year.
Compounding refers to the frequently with which the bank calculates the interest on the
deposits. The interest is then added to the balance. A simple example. If you deposit Rs.
1000 with the bank at 10% interest rate maturing after 3 year one year it becomes Rs.
1100 another amount Rs. 100.
 As interest will be added Second year and yet another in third year , so the amount you
will receive on maturity will be a bigger amount Rs. 1300

FACTOR AFFECTING INTEREST RATE

 Interest rate depends on the activities and fluctuations in the money market. It depends on the
demand and supply of money in the economy at a given time the three main economic factors
that affect interest rates.

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 Policies of the Central Bank: The apex bank or the central bank of the country
(RBI in India) is responsible for monetary stability in the country. To achieve this
objective an important function of the central bank is credit control. The apex bank
controls the money supply in the economy through measures like changing the Cash
Reserve Ratio and the Repo Rate and Reserve repo rate.
The repo rate in common terms, is the interest rate at which commercial banks borrow
from the RBI. When there is inflation and the central bank wants to curb money supply
and interest rate and CRR. Thus making borrowing costly. Thus commercial banks in
turn pass on this increased rate to its customers rates id lowered by the Central bank.
Thus making credit cheaper for investment.

RECESSION:
 During recession economic activities slow down. Expectation of fall in profit margins
discourages investment reducing the demand for credit this result in fall in interest rate.
Inflation- Inflationary pressures tend to raise the market interest rates. This is because
when prices are expected to rise considerably. The lender will be reluctant to lend during
that period fearing a loss of purchasing power of the loaned amount, on maturity. To
compensate this loss a higher interest rate in charged.

State of the economy: When the economy is growing, the Demand is also growing
with increased expectation of profit in the future. Hence there is more deem and for credit
for investment purpose. This raises the interest rate. The opposite happens during
recession.

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INDIA PRIME LENDING RATES
 Bank Lending Rate in India remained unchanged at 9.55 percent in October from 9.55
percent in September of 2017. Bank Lending Rate in India averaged 13.71 percent from 1978
until 2017, reaching an all-time high of 20 percent in October of 1991 and a record low of 8
percent in July of 2010.

INDIA PRIME LENDING RATE

 In India, the prime lending rate is the average rate of interest charged on loans by five major
banks. This page provides - India Prime Lending Rate - actual values, historical data,
forecast, chart, statistics, economic calendar and news. India Prime Lending Rate - actual
data, historical chart and calendar of releases - was last updated on November of 2017.

Actual Previous Highest Lowest Dates Unit Frequency

9.55 9.55 20.00 8.00 1978-2017 Percent Monthly

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What is Monetary Policy?
The instruments of monetary policy used by the Central Government depend on the level of
development of the economy, especially its financial sector.

Reserve requirement:
 The Central Bank may require Deposit Money Banks to hold a fraction (or a Combination) of
their deposit liability (Reserve) as vault cash and or deposit with it. Fractional reserve limits
the amount of loans banks can make to the domestic economy and thus limit the supply of
money. The assumption is that Deposit Money Banks generally maintain a stable relationship
between there reserve holding and the amount of credit they extend to the public.

Open market operations:

 The Central Bank buys or sells (On behalf of the Fiscal Authorities (Treasury) securities to
the banking and Non-Banking public that is in the Open Market. Once such securities is
Treasury Bills. When the Central Bank sells securities. It reduces the supply of reserve and
when it buys (back) securities by redeeming them it increase the supply of reserve to the
Deposit Money Banks thus affecting the supply of money.

Lending by the central bank

 The Central bank sometimes provides credit to deposit money banks, thus affecting the level
of reserves and hence the monetary base.

Interest rate
 The Central bank lends to financially sound deposit Money banks at a most favorable rate of
interest called the minimum rediscount rate. The MRR sets the floor for the interest rate in
the money market (the normal anchor rate) and thereby affects the supply of credit, the
supply of saving (which affects the supply of reserve and monetary aggregate) and the supply
of investment (which affects full employment and GDP).

Page | 27
Direct credit control:
 The Central bank can direct deposit money banks on the maximum percentage or amount of
loans (credit ceilings) to difficult economic sector or activities, interest rate caps. Liquid asset
and credit guarantee to preferred loans. In this way the available savings is allocated and
investment directed in particular directions.

Moral Suasion:
 The Central bank issues licenses or operating permit to Deposit money banks and also
regulates the operation of the banking system. It can from this advantages, persuade
banks to follow certain paths such as credit restraint or expansion, increased saving
mobilization and promotion of exports through financial support, which otherwise they
may not do on the basis of their risk/ return assessment.

Prudential Guidelines:
 The Central Bank may in writing require the deposit money banks to exercise particular care
in their operations in order that specified outcomes are realized. Key elements of prudential
guidelines remove some discretion form bank management and replace it with rules in
decision making.

Exchange rate:
 The balance of payments can be in deficit or in surplus and each of these affect the monetary
base and hence the money supply in one direction or the other. By selling or buying foreign
exchange. The central bank ensures that the exchange rate is at levels that do not affect
domestic money supply in undesired direction through the balance of payments and the real
exchange rate. The real exchange rate when misaligned affects the current account balance
because of its impact on external competitiveness. Moral suasion and prudential guidelines
are direct supervision or qualitative instruments. The others are quantitative instruments
because they have numerical benchmarks.

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INTRUMENTS OF MONETARY POLICY

 The RBI has numerous instruments of monetary policy at its disposal in order to regulate
the available. Cost and use of monetary and credit. Using these monetary policy instruments,
the RBI must walk a tightrope between trying to stimulate growth while keeping inflation
under control.

DIRECT REGULATION:

Cash Reserve Ration (CRR):

Commercial banks are required to hold a certain proportion of their deposits in the form of
cash with RBI. CRR is the minimum amount of cash that commercial banks have to keep
with the RBI at any given point in time. RBI uses CRR either to drain excess liquidity from
the economy or to release additional funds needed for the growth of the economy.
[For Example]If the RBI reduces the CRR from 5% to 4%, it means that commercial banks
will now have to keep a lesser proportion of their total deposits with the RBI making more
money available for business. Similarly if RBI decides to increase the CRR the amount
available with the banks goes down.

STATUTORY LIQUIDITY RATION (SLR)

SLR is the amount that commercial banks are required to maintain in the form of gold or
government approved securities before deposits available with a commercial to the customer.
SLR is stated in terms of a percentage of total deposits available with a commercial banks
and is determined and maintained by the BRI in order to control the expansion of bank credit.
[For example]currently commercial banks have to keep gold or government approved
securities of a value equal to 23% of their total deposits.

INDIRECT REGULATION
Repo Rate: The rate at which the RBI is willing to lend to commercial banks is called Repo
rate. Whenever commercial banks have any shortage of funds they can borrow from the RBI,
against securities. If the RBI increase the Repo rate. It makes borrowing expensive for
commercial banks and vice versa. As a tool to control inflation, RBI increases the Repo rate.

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Making it expensive for the banks to borrow from the RBI with a view to restrict the
availability of money. The RBI will do the exact opposite in a deflationary environment
when it wants to encourage growth.

RESERSE REPO RATE:

The rate at which the RBI is willing to borrow from the commercial banks is called reverse
repo rate. If the RBI increase the reverse repo rate in means that the RBI is willing to offer
lucrative interest rate to commercial banks to park their money with the RBI. This result in a
reduction in the amount of money available for the bank‟s customer as banks prefer to park
their money with the RBI as it involves higher safety. This naturally leads to a higher rate of
interest which the banks will demand from their customers for lending money to them.
The RBI issues annual and quarterly policy review statements to control the availability and
the supply of money in the economy. The Repo rate has traditionally been the key instrument
of monetary policy used by the RBI to fight inflation and to stimulate growth.

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RBI REPO RATE VS REVERSE REPO RATE TREND CHART
REPO RATE

Also known as the benchmark interest rate 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. If
RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate
similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate.
Current repo rate is 6%
REVERSE REPO RATE

Is the short term borrowing rate at which RBI borrows money from banks. The Reserve bank
uses this tool when it feels there is too much money floating in the banking system. An increase
in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a
result, banks prefer to lend their money to RBI which is always safe instead of lending it others
(people, companies etc.) which is always risky.

RELATIONSHIP BETWEEN REPO RATE AND REVERSE REPO RATE:

Months Repo rate % Reverse repo rate %

January 2015 7.75 6.75
March 2015 7.5 6.5
June 2015 7.25 6.25
Sept. 2015 6.75 5.75
April 2016 6.5 6
June 2016 6.5 6
October 2016 6.25 5.75
January 2017 6.25 5.75
April 2017 6.25 5.75
August 2017 6 5.75

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 REPO VS REVERSE REPO
REPO RATE % REVERSE REPO RATE %

7.75

7.25
7.5

6.75
6.75

6.25

6.25

6.25
6.25

6.5

6.5
6.5

5.75

5.75

5.75

5.75

5.75
6
6

6
REPO RATE VS INFLATION:

Inflation occurs due to excess of money in the market. So RBI uses repo rates and reverse
repo rate to control money in the market.
The rate at which RBI lends money to commercial banks is called Repo rate when repo rate
are increased , commercial banks have to return more money to RBI thus banks lend less
money from RBI as a result of which the money available loan interest rate to lend out in the
market. Banks increase their loan interest rate as they have less money to hand out in the
market which decreases amount of money in the market. Now, when people have less money
with them they spend less which decrease demand of product and as a result prices go down.
However, when money in the market decreases, money available with industries diminishes
and as a result production decreases. The reduction in production leads to soaring of prices of
products which are in demand which can lead to further inflation.
Therefore high repo rates and low repo rates both are dangerous and RBI carefully monitors
and governs the repo rate to control the market.

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RBI indirectly affects the CALL MONEY market rates; these are market driven interbank
short duration rates and mostly are in between the Repo rate and the reverse repo rate. No
when RBI increases the Repo rate and hence leading to an increase in the call money market
rates. The cost of short term funds for the banks increase and hence in order to stay profitable
they would be do the short term banks increase and hence in order to stay profitable they
would be do short terms lending to the corporate and individuals at a higher rate than before.

This makes the corporate and individual to restrain excess spending and hence a decrease in
the demand. This cumulative decrease in demand lends to change in the price of goods as
now supply is at the same level but the demand has decrease in the short term. Hence a real
decrease in prices leads to a reduction in inflation.

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RELATIONSHIP BETWEEN INFLATION AND BANK INTEREST RATE

Inflation is defined as an increase in the price of bunch of goods and services that projects the
Indian economy. Increase inflation in inflation figures occurs when there is an increase in the
average level of prices in goods and services. Inflation happens when there are fewer goods
and more buyers this will result in increase in the price of goods, since there is more demand
and less supply of goods.
Inflation causes increase of interest
Inflation can be recognized as a combination of 4 factors:

 The supply of money goes up

 The supply of goods goes down
 Demand for money goes down
 Demand for goods goes up

Our India Government gets involved in it to control the inflation by adjusting the level of
money in our economic system. The most noticeable way to increase the money flow in the
system is to print more currency, and then the rupees will become more relative to goods.

INFLATION AND GLOBAL LIQUIDITY

Factors like rates of import and export the productions cost of farms, value of dollar and
price of oil (crude oil) market movements of other overseas markets are not isolated from all
these issues now. Due to the remarkable economic growth of India over the recent years.
Increase in foreign currency inflow caused the demand in multiples for money merchandise
and services in India. RBI needs to control this excess liquidity in our economic system. For
this RBI increase the “Repo Rate” which makes costly credits and thus increases the CRR.
This kind of measures by RBI can only control the inflation to a certain extent only.

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 LITERATURE REVIEWS

In the development and developing countries, many studies have been conducted to test the
impact banking lending with respect to monetary policy announcements in India, only very
few studies has been conducted. Some of the select studies relevant to the present study are
reviewed.
The study “ the effects of Monetary policy on bank lending and aggregate output (2005)
explains Asymmetric from Nonlinearities in the lending channel is also reflect asymmetric
effects of monetary policy whether contractionary and expansionary policies have
asymmetric impacts on bank loans and whether there are further differences in the response
of small banks and big banks to policy actions. We also investigate the link is to
simultaneously capture the existence of the lending view of the monetary transmission
mechanism the strong relationship between loan growth and output growth and the
asymmetric effect of monetary policy on output. This study uses a nonlinear vector
autoregressive approach to carry out our analysis. Result show that asymmetry in the
response of bank lending to monetary policy is not a substantially contribution factor in
explaining the different responses of output to contractionary and expansionary policy.
Monetary policy and long-term Real rates. It document that changes in the stance of
monetary policy have surprisingly strong effects on very distance forward real interest rates.
Concretely we show that a 100 basis –point increase in the 2 year normal yield on a Federal
Open markets committee announcement day which we use as a proxy for changes in
expectations regarding the path of the Federal funds rate over the following several quarters
is associated with a 42 bps increase in the 10 year forward overnight real rate, extracted from
the yield curve for Treasury inflation protected securities.

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The bank lending channel of monetary policy and its effects on mortgage Lending (May,
2010) explains the bank lending channel suggest that banks play a special role in the
transaction of monetary policy. In this theory monetary policy has an effect on banks cost of
fund in addition to the change in the risk free rate lending to an additional response in bank
lending. The supply of intermediated credit therefore has a unique response to monetary
policy. To analyze the bank lending channel, the study the response of banks to monetary
policy in the context of mortgage funds and mortgage lending. We focus on lending in
subprime communities, because it is a form if information intensive lending which affects
banks choice in funding sources and their response to changes in funding costs. Our paper
helps explain how mortgage loan supply response to monetary policy by addressing the role
of banks in the transmission of monetary policy.

Page | 36
 Research Methodology

STATEMENT OF THE PROBLEM

Repo rate and other monetary ratio are important measurers which control the liquidity in the
market. Changes in repo rate have direct impact on bank‟s cost of borrowing, general people
interested to know the interest rate of loan and deposit in banking sector duration the change
in reverse repo rate and other monetary rate announcement period.

In the recent small and medium scale investor in property market may not aware about loan
rate movements in banking sector after the announcement of repo rate this change at what
level affect their EMI. Hence, the present study is an attempt to test the impact of rising repo
rate on bank‟s lending.

OBJECTIVES OF THE STUDY

The following are the objective of the study.

 To analyze the impact of repo rate on bank‟s interest rate after announcement period.
 To test the relationship between repo rate and inflation
 Analysis the relationship between interest rate and inflation

IMPORTANT/ NEEDS OF THE STUDY

 The study aims to help investor and general person to making investment by providing
adequate information about impact of change in repo rate which help to take making strategy
for their EMI and Investment portfolio.

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 Analysis and interpretation
PERIOD INFLATION REPO RATE
January 2017 3.17 6.25
February 2017 3.65 6.25
March 2017 3.81 6.25
April 2017 2.99 6.25
May 2017 2.18 6.25
June 2017 1.54 6.25
July 2017 2.36 6.0
August 2017 3.36 6.0
September 2017 3.28 6.0
October 2017 3.58 6.0

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 BANKING SECTOR IN INDIA

Public sector bank

Public Sector Banks (PSBs) are banks where a majority stake (i.e. more than 50%) is held by a
government. The shares of these banks are listed on stock exchanges. There are a total of 21
PSBs in India.

Private sector bank

The private-sector banks in India represent part of the Indian banking sector that is made up of
private and public sector banks. The "private-sector banks" are banks where greater parts of
share or equity are not held by the government but by private share holders.

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BANKING STRUCTURE IN INDIA

Page | 40
Page | 41
MANAGEMET OF CAPITAL

Bank capital

 Banks hold capital to provide protection against unexpected losses. Traditionally capital of a
bank constitutes a very small fraction of its total assets. The leverage ratio of banks is very
small when compared to similar ratios of non –financial institutions. Even the 8% ratio of
capital weighted assets does not aim at protecting banks losses. Provision and reserves should
take care of them.

Long- terms debt

 Debentures and subordinated debt are sources of external funds. Debt is “subordinated”
because debt is second in priority to depositor claims in the event of liquidation. Banks debt
by and large in the form of short and intermediate term deposit and non-deposits funds
derived from money market.

Loss reserve
 There are two reserves that banks set aside. Loan loss reserve is set up to meet anticipated
loan losses. Earning is set aside towards the provision for loan loss. Tax burden is reduced
when expanding provision for loan loss. When a loan defaults the loss is deducted from the
reserve account.

CORRECTION OF CAPITAL DEFICIENCY

 Capital requirements are used by regulators to control risk taking by bank. A bank with
abnormal risk level has to have capital in excess of minimum requirements banks judged to
 Changes in the assets to capital ratio.
 Changes in the dividend payout ratio.
 Changes in profitability
 Employee stock ownership.
 Raising funds from capital market
 Recapitalization
 Mergers

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CAPITAL ISSUES
Banks may raise capital by issuing new securities. Either equity or debentures prior to July 1998.
Banks in private sector had to obtain prior approval of the allotment to employees and bonus
shares. After July 1998, private sector banks whose share is already listed can make further
issues. The issue of bonus shares requires prior approval.

REFUND OF CAPITAL:
The reduction in capital result in an improvement in earnings per share and helps the concerned
banks in better pricing of their share at the time of public issue. Between 1995-96 and 2003-04,
public sector banks have returned to Government of India, paid up capital aggregating Rs. 1,303
cores.

WRITE OFF
Write off of accumulated losses against paid up capital would enable public sector banks to have
Earning per share (EPS) at a higher level for public issues. Public sector banks have provided to
write off losses of Rs. 8,680 cores.

RECAPITALIZATION
Recapitalization involves fundamental changes in the owernership position of shareholder,
through a large stock offering, or merger into another bank or withdrawal of shares to reduce
shareholders equity a bank in difficulties is recapitalization.

CRITERIA FOR EVALUATION

According to the working group the criteria for evolution of a bank are,
 Capital adequacy ratio
 Coverage ratio
 Return on assets
 Net interest margin
 Ratio of operating profit to average working funds
 Ratio of cost to income
 Ratio of staff cost to the net interest income plus all other income.

Page | 43
ROLLOVER LOAN AND FLEXI RATES
To avoid interest rate risk in variability of future funding costs and loaned at fixed rate, the
syndicated international loans were made at variable rates of interest linked in variably to
LIBOR and adoption of rollover loans. Rollover lending involved the adjustment of assets in
accordance with potential liabilities. Rollover lending however, resulted in a shifting of risk
to bank borrower who faced additional uncertainty in merging cash flow and impairing his
ability to service the debt, while avoiding interest rate risk credit risk is created.

OVERALL RISK OF BANKS

Banks overall risk can be defined as the probability of failure to achieve an expected value
and can be measured by standard derivation of the value. Banks that manage their risks have
commutative advantages. They take risks consciously anticipate adverse change and protect
themselves from such changes. The chart of check list for risk management compiled by
bank of Japan and quoted by RBI in the report on trend and progress of banking in India,
1996-97 which is quite comprehensive.

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Credit Risk
On- Balance sheet assets
Domestic
On –Balance sheet Asset
Interest rate risk
Mismatch positions
Dealing in public bond
Management of securities in the
investment Account
Foreign exchange Risk
Liquidity Risk
Operation Risk
EDP Risk
Systematic Risk
Management Risk
Management and internal control
Management policy
Internal control
Profit loss management and
accounting policy
Contingency plan
Lending operation
General
Domestic credit administration
Overseas credit administration
Overall Market operations
Trading
Securities investment
Feed management (Non- trading
account
ALM
Business operation EDP Risk
Page | 45
 INTEREST RATE RISK

Net interest risk

 Net interest income which is the difference between interest income and interest expenses is
the principle determinant of the profitability of banks. Net interest income is determined by
interest rates on asset and paid for funds, volume of funds and mix of funds (portfolio
composition). Changes in interest rate affect the net interest income. Whenever rate of
interest conditions attaching to assets and liabilities diverge, then changes in market interest
rate will affect will bank earning. If a bank attempts to structure its assets and liabilities to
eliminate interest rate risk. The profitability of the bank would be impaired.

Mismatch of Assets and Liabilities

 A bank may borrow short and lend long. The mismatch of assets and liabilities gives rise to
interest rates can result in losses for the bank.

Variable Interest rate

 Each bank through its choice form different types of assets and liabilities can alter the
structure of its balance sheet in order to increase or decrease interest rate exposure.
Yield Curve
 Yield curve plays an important role in interest rate risk management. Banks accept interest
rate risk and maintain a slight liability sensitive position (rate sensitive assets less than rate
sentivitive liabilities
Maturity of funding Gap
 The interest sensitivity position of a bank is usually measured by its gap, which is defines as
the different between the volume of interest sensitive assets and liabilities interest sensitive.
Duration
 Duration measures the interest rate risk of a financial instrument. It shows the relationship
between the changes in volume of a financial instrument and change in the general level of
interest rates.

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Modified Duration
 Modified duration provides a standard measure of price sensitivity to calculate the duration
of the portfolio of the portfolio as the weighted average of the duration of its individual
components.

Future, Option and SWAP

 These derivative instruments allow a bank to alter interest rate exposure and each has
advantages and disadvantages compared with the other. When taken together they give a
bank enormous flexibility in managing interest rate risk.

Futures
 A futures contract is a standardized agreement to buy or sell an asset on a specified date in
future for a specified price. The Bayer agrees to take delivery at a future date at today‟s
determined price, and the seller agrees to make delivery at a future date at today‟s established
price.
Options on Future contracts:
 Interest rate risk may also be hedge through options on futures contracts. An option provides
the buyer with the right, but not the obligation, to buy or sell an agreed amount of an
underlying instrument (such as a T-bill future contact) at an agreed price.
SWAP
 SWAP came into vogue in 1981. They are used widely by banks. At the end of 2004
outstanding (OTC) amount of interest rate swaps was $147 trillion. Swaps are private
arrangements to exchange cash flow in future according to a prearranged formula.
Interest rate SWAP
 In an interest swap two parties, called counter parties agree to exchange periodic interest
payments. The amount of interest payments exchanged is based on some predetermined
principal who is called the national principle amount.

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Types of Interest Rate Swaps
 Fixed-for-Floating
 Base Swaps (Floating-to-Floating Swaps)
 Zero Coupon for Floating Swap
 Forward Swaps (or Delayed Rate Setting Swaps)

Separating Interest Rate Risk and credit risk

 Banks do not want to make long-term loans at fixed rate of interest because rate of the
interest rate risk. Banks prefers the floating rate loan. With a swap the borrower rate
risk. The swap allows the separation of interest rate risk from credit risk. The bond
market carries rate swaps there is no exchange of notional or actual principle. If the
time of reciprocal interest payments coincide only the net different is paid.

Pricing interest rate swaps

 Pricing covers relevant interest rates and interest payment schedules and free for swap
dealer‟s services. The interest rates are set to provide a spread which runs from 5 to
10 basis points. Interest rate swaps are standardized and do not generate fee income.
 Spreads on interest rate swaps are quite narrow reflecting low risks and the huge and
liquid financial markets. Narrow spreads provides an incentive to use interest rate
swaps.

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 Types of Government securities: Treasury Bills

14 days Auction treasury bills introduced on June 6, 1997 Auctions were

discontinued with effect from May 14, 2001.

91 day treasury bills

- Open market operations are conducted by RBI in these bills. These bills are self financing
in character. The notified amount is varied between Rs. 500 to Rs 1500 cores depending
on liquidity conditions. The implicit yield at cut off price.
182 day treasury bills
- The 182 day bills were discounted effective form May 14, 2001. Total issues were Rs.
600 cores. They have been reintroduced form April 6, 2005.
364 day Treasury bills
- The notified amount is Rs 1000 cores. The implicit yield at cutoff privet was 4.44% on
March 31, 2004.

Liquidity Adjustment facility (LAF)

- Liquidity adjustment facility is operated by RBI through REPOs and reverses Repos in
order to set a corridor for money market interest rates. This is pursuant to the
recommendations of the committee on banking sector reforms.
- LAF is introduced in stages. In the first stage with effect from June 5, 2000 RBI
introduced variable REPO actions with same day settlement. The amount of REPO and
reverse REPO are changed on a daily basis to manage liquidity. The actions are held in
Government dated securities and treasury bills of all maturities except 14 days treasury
bills for parties holding SGL account and current account with RBI Mumbai. While
liquidity is an absorbed by RBI to minimize volatility in the money market, LAF can also
augment liquidity through export credit refinance and liquidity support to primary
dealers.
- The fortnightly average utilization including export credit refinance has ranged between
RS. 4119 cores and Rs 7697 Crore during April to October 1999.

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- Reserve liquidity with overnight fixed rate repo rate and reverse repo. Auctions of 7 day
and 14 day repo (reverse repo in international parlance) were discontinued from Nov 1,
2004. Absorption of liquidity by LAF window is termed reverse repo and injection of
liquidity. LAF has emerged as the tools for liquidity management and signaling device
for the interest rate in the overnight markets.

YIELD TO MATURITY OF CENTERAL GOVERNMENT DATED SECURITIES

 Of the outstanding central and state government secures of Rs.8,07,292.6 cores in

2003 SCBS on 58.56% and there ownership of central government securities was
58.99% (of total Rs.1,33,089.6 cores) the distribution of their investment in
government securities of Rs.5,51,203 between center and state was 85.8% and 14.2%
in 2003.
 The one year yield rate was 5.66% in March 2005, in medium term segment the 5
year yield rate was 6.36% and at the longer end the 10 years yield rate was 6.65%.
The trends in yield –movement in the Government securities market during 2004-
2005 showed that while the short rates responded reflecting the ripple impact of
policy changes.
 The average yield spread between 1 and 10 year maturity for central Government
dated securities was 114 basis points in 2003-04 and the average spread between 1
and 20 year maturity was 148 basis points. The components of spread are term risk
premier and inflation expectation, relatively higher risk premier arising from
uncertainties surrounding the fiscal policy and the Government borrowing
programmed in future and information bottlenecks.
Timely and adequate information plays a critical role in drawing long-term contracts,
reducing rate volatility basing investment decision on rational criteria and reacting to
market to market developments in a quick and efficient way.

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 FOR INFRASTRUCTURE SECTOR INDIA NEEDS LONG TERM
DEBT MARKET.

- Bad debt held by Indian banks is growing as the economy slows down and infrastructure
projects stall, from Rs. 1.3 laky Crore at the end March 2012, these have jumped to Rs
2.4 lakh Crore at the end of December 2013. India‟s infrastructure companies grew at the
end pace through most of the 2000s embarking on spectacular projects fuelled by debt.
As they have slowed down critics say that they should not have taken on as much debt as
they did. This criticism is largely unfair.
- For companies to emerge from being relatively puny contracting entities too publicly –
listed Infrastructure developers funding was necessary and loans the only viable option.
Equity alone could not keep up with the rate at which projects were growing. The biggest
flaw in India‟s infrastructure funding model is that it was largely financed by banks,
which hold mostly short-term cash but lend for longer term projects like building
highways and power plants.
- Today this has resulted in a large and growing asset- liability mismatch for the banks.
They in turn are forcing borrowers to liquidate assets often at throwaway prices.
- If this continues no businessman will have any appetite to embark on infrastructure
projects. How can we get out of this hole?
- India needs to develop a market for long term debt ring fenced according to maturity. In
other words funds raised for 20 year say should fund projects for 20 years. The world
over, the longest term investors are insurers and pension funds. In India insurers find it
difficult to invest in long term project debt. Rules must change and special vehicles
meant to develop infrastructure, such as IDFCBSE 2.23% and IIFCL, must develop the
expertise to vet projects and guarantee their debt services.

Page | 51
Conclusion:

 The decision to raise or reduce rates depends on the demand and supply conditions not a
mere rise or fall in repo rate.
 Lending rates weren‟t directly linked to repo rates, but were dependent on banks cost of
funds.
But banks could raise lending rates in some segments, depending on the credit rating of
client and the relative cost to the banks.
The RBI changes the repo rate etc. to control the money supply of the country this study
is an effort to understand whether reverse repo rate announcements hold any information
content for the debt market that may lead to changes in the interest rate and to test the
impact of reverse repo rate on interest rate of India banking.
 The result of the study showed that the amount of loan varies to the announcements of
reverse repo but its impact not immediately on banking loan that is becoming clearer in
the current scenario. Lending rates dependent on the cost of fund s. for many quarts
deposits rate have not changed even when the repo rate went down or up. Deposits rates
in a way are linked to inflation.
 There is enough liquidity in the system so there will be no immediate increase in deposit
and lending rates. Banks have seen huge inflows in the form of FCNR (Foreign Currency
Non-Reparable) deposits and they are looking at avenues at for deploying those funds.
 The gravest risk to the value of the rupee is from CPI (Consumer price Index) inflation
which remains elevated at close to double digits deposited the anticipated disinflation in
vegetable and fruit prices.

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Suggestion of study

 This study suggests that any announcement of repo rate is not impact banks rate
immediately.
 Investor should be focus on all instruments like SLR, CRR, Reverse repo and market
operation.
 Also consider the other environmental factors which affect the repo rate decision.
 Find out the reason behind the repo rate announcement.

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REFERENCES

 A.K. capital Services LTD. (N.D.) Basis of debt market. Knowledge center,4
 Economics times, (March 31, 2014) four reasons why Raghurajan may not
tinker rates on April 1, policy.
 Harsh it Harlalka Q.M (2014) why did RBI repo rate to 8.0% and why it
may not potentially rates for the banks help inflation banking India.
 International E, (Jan 2014) consumer lending in India, Euromonitor.

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