Reserve Bank of India is the custodian for the nation and it provides policies which regulate money affairs for India at domestic front and at global font.
The real key policy or 'signalling' rates include bank rate, the repo rate, the reverse repo rate, cash reserve ratio and statutory liquidity ratio.
RESERVE BANK OF INDIA (RBI) increases its key policy rates if greater volume of money is available within the economy. To put it differently, when an excessive amount of funds are chasing an identical or lesser amount of goods and services.
Conversely, a liquidity crunch or recession, RESERVE BANK OF INDIA would lower its key policy rates to inject more cash into financial system.
What is repo rate?
Repo rate, or repurchase rate, is the rate at which RESERVE BANK OF INDIA lends to banks for short periods. This is done by RESERVE BANK OF INDIA buying government bonds from banks with an agreement to sell them back at a fixed rate.
If the RESERVE BANK OF INDIA wants to make it more expensive for 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. The current repo rate is 5.50%.
Precisely what is reverse repo rate?
Reverse repo rate is the rate of interest at which the RESERVE BANK OF INDIA borrows funds from different banks within the shorter term.
Such as the repo, this can be carried out by RESERVE BANK OF INDIA selling government bonds to banks together with the resolve to buy them back at a future date.
The banks utilize the reverse repo facility to deposit their short-term excess funds with the RESERVE BANK OF INDIA and earn interest for it.
RESERVE BANK OF INDIA can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate leads to reducing the liquidity and pushes up rates of interest.
Exactly what is Cash Reserve ratio (CRR)?
Cash reserve Ratio (CRR) would be the quantity of funds that banks need to park with RESERVE BANK OF INDIA. If RESERVE BANK OF INDIA decides to raise the cash reserve ratio, the available amount with banks would cut back. The bank increases CRR to impound surplus liquidity.
CRR serves two purposes: One, it indemnify a portion of bank deposits and will almost always be now available to meet withdrawal demand, and secondly, it enables that RESERVE BANK OF INDIA control liquidity within the system, and thereby, inflation by tying their hands in lending money. The existing CRR is 6%. You can get latest updates about RBI credit Policy here.
What exactly is SLR? (Statutory Liquidity Ratio)
Except keeping a portion of deposits with RESERVE BANK OF INDIA as cash, banks are likewise needed to retain a minimum percentage of deposits with their organization right at the end of each business day, by means of gold, cash, government bonds or other approved securities. This minimum percentage is known as Statutory Liquidity Ratio.
In the course of the high growth, a rise in SLR requirement reduces lendable resources of banks and pushes up rates of interest. The existing SLR is 25%.
Exactly which is the bank rate?
Unlike other policy rates, the bank rate is purely a signalling rate and the majority rates of interest are de-linked from the bank rate. Also, the bank rate is the indicative rate at which RESERVE BANK OF INDIA lends money to other banks (or financial institutions) the bank rate signals the central bank's long-term outlook on rates of interest.
In the event the bank rate moves up, long-term rates of interest also are likely to move Northwardly, and vice-versa.
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