|Policy Repo Rate
|Standing Deposit Facility Rate(SDFR)
|Marginal Standing Facility Rate
|Fixed Reverse Repo Rate
|Cash Reserve Ratio(CRR)
|Statutory Liquidity Ratio(SLR)
Accepting Deposits and lending the same are the main activities of banks. Bank credit plays an important role in the growth of the economy. Apart from economic growth,Reserve Bank of India(RBI) closely monitors the level of inflation prevailing in the country. Maintaining monetary stability is an important responsibility of RBI.
One of the definitions of inflation is?oo much money chasing too few goods? RBI has to balance between the growth of economy and level of inflation. The central bank of the country watches carefully their movement and intervenes to take corrective steps whenever necessary. To achieve its objective it requires some tools through which it can influence their movement.
Cash Reserve Ratio (CRR),Statutory Liquidity Ratio (SLR) , Repo Rate , Reverse Repo Rate and Bank Rate are some of the tools available with Reserve Bank of India to achieve these objectives,
Cash Reserve Ratio (CRR) :CRR is the portion of the deposits (total demand and time liabilities ) of a bank to be kept as cash reserve. The banks can maintain the cash reserve in the form of cash with the bank itself or credit balance in its account maintained with RBI It is a statutory requirement.
Statutory Liquidity Ratio (SLR) : SLR is the portion of deposits ( net demand and time liabilities )of a bank to be maintained as cash, gold or approved securities. To certain extent this ensures the liquidity and safety of deposits of the bank apart from acting as a tool for RBI to maintain monetary stability.
Repo Rate: Repo Rate is the rate at which banks can borrow money from RBI against listed securities with agreement to repurchase the securities at a specified future date from RBI. Mostly banks use Repo mechanism to meet their short term requirement for funds.
Reverse Repo Rate :Reverse Repo Rate is exactly the opposite of the Repo Rate .Banks can park their funds with RBI to take advantage of the higher Reverse Repo Rate.
Bank Rate:Bank Rate is the rate at which commercial banks can borrow money from RBI. The Bank Rate movement indicates the long term health of the economy. Upward revision of Bank Rate will make funds costlier for banks which may result in banks raising their lending rates.
If RBI feels that money supply is to be expanded,it may inject the same to the banking system by reducing CRR or SLR or both .The percentage of funds used to keep CRR/SLR will come down and banks will have more funds for lending. In the reverse direction ,by raising CRR/SLR , RBI can suck the excess money supply in the system.
CRR earns no interest for banks. Investment in government securities to maintain SLR earns lesser return . After using 4.00 % on CRR and 21.00 % on SLR Banks will be left with 75.00 % of deposits for lending to others.(Policy Rates as on July 22,2016) Even after exhausting all the available funds ,if the bank identifies good proposals for lending at an attractive interest , the bank can receive funds from RBI at Repo Rate against the listed securities or at Bank Rate (which is higher than Repo Rate). Receiving funds at a lower rate and lending the same at higher rate , banks can improve their profit.
Reduction in Repo or Bank Rate will decrease the cost of funds for banks. The lesser cost of funds may be passed on to borrowers by reducing the interest on loans. With lesser interest rate ,demand for bank funds will increase . On the other hand, increase in Repo or Bank Rate will increase the cost of funds for banks. The banks may be forced to increase interest rate to its customers resulting in lesser demand for bank funds.Back..