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BANKING AWARENESS BANK RATES
Monetary policy is the process by which monetary authority of a country, generally central bank controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth.
In India, the central monetary authority was Reserve Bank of India. All these bank rates are controlled by Reserve Bank of India.
These rates are not constant values which may be changed once in every three months. The present rates as per 8Th April 2017.
The present rates are given below.
|2||Cash Reserve Ratio (CRR)||4%|
|3||Statutory Liquidity Ratio (SLR)||20.50%|
|4||Repo Rate (RR)||6.25%|
|5||Reverse Repo Rate (RRR)||5.75%|
|6||Marginal Standing Facility (MSF)||6.5%|
All these terms will be explained below.
- Bank Rate
- This is the long term rate.
- Repo rate is for short term.
- Which central bank (RBI) lends money to other banks or financial institutions.
- Bank rate is not used by RBI for monetary management now.
- It is now same as the MSF rate.
- Current bank rate is 5%.
- Cash Reverse Ratio (CRR)
- Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances.
- Always CRR between 15 percent and 3 percent.
- When a bank’s deposits increase by Rs 100, and if the cash reserve ratio is 9%, the banks will have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for investments and lending, credit purpose.
- Therefore, higher the ratio, the lower is the amount that banks will be able to use for lending and investment.
- This power of Reserve bank of India to reduce the lendable amount by increasing the CRR makes it an instrument in the hands of a central bank through which it can control the amount that banks lend.
- Current CRR is 4%.
- Statutory Liquidity Ratio (SLR)
- Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities.
- Liabilities as liquid assets in the form of cash, gold and unencumbered approved securities.
- RBI is empowered to increase this ratio up to 40%. An increase in SLR also restricts the bank’s leverage position to pump more money into the economy.
- There was a reduction of SLR from 38.5% to 25% because of the suggestion by Narsimham Committee. The current SLR is 20.50%.
- Repo Rate (RR)
- Repo rate is the rate at which RBI lends to its clients generally against government securities.
- It is also known as the benchmark interest rate is the rate at which RBI lends money to the banks for a short term.
- When 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,
- The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.
- The current Repo Rate is 6.25%.
- Reverse Repo Rate (RRR)
- Reverse Repo rate is the short term interest rate at which RBI borrows money from the commercial banks.
- 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.
- Current Reverse Repo Rate is 5.75%.
- Marginal Standing Facility (MSF)
- It is a special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash shortage. MSF rate is higher than Repo rate.
- The current Marginal Standing Facility (MSF) is 6.50%.
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