At first let us consider two similar rates – bank rate and repo rate. Bank rate is the rate of interest that commercial banks and other financial intermediaries have to pay on the loan that they take from country’s central or federal bank. Repo rate is similar to bank rate except that it is applicable to short term loans while bank rate is applicable to long term loans. In India Reserve Bank of India (RBI) is central bank. Suppose that bank rate in India is 5% which means that if a commercial bank takes a loan of 1 million rupees from central bank then it has pay 5% of 1 million i.e. Rs. 50,000 as the interest. Reverse repo rate is the counterpart of repo rate. It is the rate of interest commercial banks and other financial intermediaries receive on excess funds they deposit with the central bank. Now suppose the commercial bank deposits 1 million rupees in central bank with reverse repo rate being 5% then the commercial bank will receive Rs. 50, 00 as interest on their deposit. The three above mentioned rates are also referred to as policy rates.
Cash reserve ratio(CRR) and statutory liquidity ratio(SLR) are reserve ratios which put a limit on the minimum amount of reserve that commercial banks and other financial intermediaries are required to keep in central bank. CRR is the percentage of their total deposits that the commercial banks have to keep in central bank in form of cash. SLR is similar to CRR except that apart from cash other liquid assets like precious metals such as gold and approved short term securities like treasury bills may be used to meet the reserve requirements. A better understanding of reserve ratio will be possible after going through the example provided below. Assume that the CRR and SLR are 6% and 20% respectively and a commercial bank has a total deposit of 10 million rupees with itself. Now the bank has to keep 0.6 million rupees in cash as a deposit with central bank and make a net deposit of 2 million rupees in form of liquid assets with the central bank.
The RBI reviews these rates and ratios on a monthly basis with intent to keep a check on money supply and inflation rate in economy. In order to increase the supply of money in economy RBI may decrease its policy rates and reserve ratios. The decrease will have the combined effect of increasing the deposits available with the commercial banks which may be offered as loans to general public thereby pumping money into the economy. The current value of these ratios and rates can be found at http://www.rbi.org.in/home.aspx
Cash reserve ratio(CRR) and statutory liquidity ratio(SLR) are reserve ratios which put a limit on the minimum amount of reserve that commercial banks and other financial intermediaries are required to keep in central bank. CRR is the percentage of their total deposits that the commercial banks have to keep in central bank in form of cash. SLR is similar to CRR except that apart from cash other liquid assets like precious metals such as gold and approved short term securities like treasury bills may be used to meet the reserve requirements. A better understanding of reserve ratio will be possible after going through the example provided below. Assume that the CRR and SLR are 6% and 20% respectively and a commercial bank has a total deposit of 10 million rupees with itself. Now the bank has to keep 0.6 million rupees in cash as a deposit with central bank and make a net deposit of 2 million rupees in form of liquid assets with the central bank.
The RBI reviews these rates and ratios on a monthly basis with intent to keep a check on money supply and inflation rate in economy. In order to increase the supply of money in economy RBI may decrease its policy rates and reserve ratios. The decrease will have the combined effect of increasing the deposits available with the commercial banks which may be offered as loans to general public thereby pumping money into the economy. The current value of these ratios and rates can be found at http://www.rbi.org.in/home.aspx
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