Policy Rates and Reserve Ratios

Policy Rates and Reserve Ratios

In the previous article, you must have come across following terminologies Repo Rate, Bank Rate, Reserve Repo Rate and Marginal Standing Facility Rate. All these terms togetherly are known as policy rates. 

Now the question arises what are they and why policy rates are required to run country’s economy?

The Answer is simple
  • Policy rates are nothing but the economic tools used to maintain the financial stability in India.
  • These rates are reviewed bi-monthly by RBI.
Repo Rate
  • The rate at which RBI lends money to the commercial banks by purchasing the security from the bank for a shorter time is called as REPO rate.
  • Current Repo rate is 5.75 %.
  • An increase in Repo Rate means commercial bank can borrow less money from RBI, that makes the bank to lend the money to consumer at higher interest rate, which results in decrease of money supply in market.
Bank Rate
  • The rate at which RBI lends money to the commercial bank by purchasing security for a longer time duration is called as bank rate
  • Current Bank rate is 6.00 %.
  • Bank rate is always higher than Repo rate as the lending is done for a longer period of time.
Reverse Repo Rate
  • It is exactly opposite to the Repo rate.
  • In Reverse repo, RBI sells the security to the commercial bank in order to borrow from the commercial bank.
  • Reverse repo rate is always less than repo rate.
  • current reverse repo rate is 5.5 %
Marginal Standing Facility Rate
  • It is the rate at which commercial bank can borrow money from RBI overnight.
  • Banks can borrow funds through MSF during acute cash shortage (considerable shortfall of liquidity). This measure has been introduced by RBI to regulate short-term asset-liability mismatches more effectively.
  • Current MSF rate is 6.00 %  
Reserve Ratio

The Ratio in which certain amount of money is needed to deposit with the RBI in order to perform a certain action.
1. Cash Reserve Ratio
2. Statutory Liquidity Ratio

Cash Reserve Ratio (CRR)
  • CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI which means banks do not have access to that much amount for any economic activity or commercial activity.
  • It is the way to control the credit flow in the market.
  • Current CRR is 4 %
Statutory Liquidity Ratio (SLR)
  • SLR is an amount that commercial bank maintains with the RBI in the form of cash, gold or Government security before providing credit to its customer.
  • SLR restricts the bank’s leverage in pumping more money into the economy.
  • Current SLR is 18.75 %

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