Key rates of RBI – its definitions & implications
As of Nov 14, 2015 the key rates are:
CRR
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4.00
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SLR
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21.50
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Repo
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6.75
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Reverse Repo
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5.75
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MSF
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7.75
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(Subject to change)
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What is CRR?
· CRR means Cash Reserve Ratio.
· Banks in India
· Right now, CRR is about 4.00% that means if people deposit total Rs.100 in SBI, then SBI would have to deposit Rs.4.00 in RBI. This is CRR or Cash Reserve Ratio.
· CRR rule does not apply to Regional Rural Banks, Non Banking Financial Companies (NBFC), Mutual funds or insurance companies.
What is SLR?
· SLR means Statutory Liquidity Ratio
· A Bank has to set aside this much money into gold or RBI approved securities.
When RBI will raise the reserve rations (SLR and CRR)?
· Suppose economy is showing inflationary trend. Prices of all goods and services are increasing day by day. RBI will raise the reserve ratios to control the inflation
We can see that, when RBI increases, reverse ratios money with SBI is reduced
Implications when RBI increases CRR, SLR:
· Banks will have less money
· So, lending of money will be reduced from Banks
Consequences when RBI increases CRR, SLR:
· Bank raises its loan interest rate
· Businessmen borrow less money from Banks
· Businessmen do not start new business and do not expand existing business
· Result = Less jobs. Even existing employees discharged. If anyone remains in the job, he doesn’t get pay raise. He starts cutting down unnecessary expenditure (e.g. buying two newspapers, getting his shirts ironed, drinking tea @ 4PM in office and so on. Thus even newspaper shop, laundry shops, tea shops incomes also reduced.)
· Result = Less income (Because of above reasons)
· Result = Less demand of goods and services (because less income).
· Ultimately shopkeeper will bring down the prices to attract people into buying more things.
· Thus inflation is reduced.
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What is Repo Rate?
· The rate, at which RBI lends short term loans to its clients, is called Repo Rate.
What is Reverse Repo rate?
· Reverse Repo rate is the interest rate which RBI pays its clients for their short-term deposits.
· Note: Reverse Repo Rate is automatically kept 1% less than Repo rate according to new RBI rules. [Since Nov.2010, Reverse Repo rate is constantly 1% less than Repo].
· SBI also has to keep part of its money in RBI approved securities (under SLR).
· So SBI cannot use those government securities to borrow under Repo Rate from RBI
What is Bank Rate?
· Bank rate is the interest rate which RBI charges from its clients for their long-term loans.
What is MSF?
· MSF – Marginal Standing Facility
· MSF is same as Repo with some differences
· MSF is always Repo + 1
Repo
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MSF
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Banks should borrow min of Rs. 5 crore and above from RBI
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Minimum Rs.1 crore
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All clients of RBI welcome here (who are all clients of RBI? – scroll back)
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Only scheduled commercial banks can borrow under this window. SBI, PNB, BoB, ICICI etc.
This MSF facility is specially created to help them solve short-term cash mis-match.
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Bankers cannot pledge securities from SLR quota to borrow from this window.
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Can use securities from SLR quota.
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No limit. Banks may borrow as much as they want.
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Maximum 2% of NDTL (Net Demand and Time Liabilities). If SBI received Rs. 100 cr from people under savings account, fixed deposit etc,, then SBI can borrow only upto Rs. 2 crore from RBI
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