Repo, CRR, SLR, Reverse Repo, Bank Rate- Explained


The Reserve Bank of India’s Monetary Policy Committee (MPC) meets every two months/ bi-monthly to review its monetary policy. The RBI’s MPC has representatives from both the RBI and the Central Government.

Monetary policy is the action taken by the RBI  to control the amount of money supply in the economy.

RBI has several monetary policy tools at its disposal to influence the money supply. They are Repo rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Reverse Repo rate and Bank rate.

Monetary Policy Tools
  1. Repo rate: Repo rate is the rate at which a bank borrows from the RBI against Government securities. To illustrate, if a bank wants to borrow money from RBI, it sells Government securities to the RBI. The bank makes an agreement with the RBI to repurchase these securities later at a predetermined rate. The interest rate charged on such borrowings is the Repo rate. If this rate increases, it becomes expensive to borrow from the RBI. Therefore, banks increase its lending rates. Hence, lending activities decline. (Repo rate ↑ ⇒ money supply ↓) The current repo rate is 6 %.
  2. Cash Reserve Ratio (CRR): It is the percentage of deposits that a bank has to keep as reserves with the RBI. When Government increases CRR, the bank has to keep a larger percentage of its deposits as reserves. It has lesser funds available to lend. Its capacity to lend decreases. Hence, money supply also decreases. (CRR ↑ ⇒ money supply ↓). The current CRR is 4%.
  3. Statutory Liquidity Ratio: It is the percentage of deposits that a bank has to invest in risk-free assets such as cash, gold or Government securities.  When Government increases SLR, the bank has to keep a larger percentage of its deposits in cash, gold and Government securities. It has lesser amount to lend to consumers and businesses. Hence, the money supply decreases. (SLR ↑ ⇒ money supply ↓). The current SLR is 20%.
  4. Reverse repo rate: Reverse repo is the rate at which banks keep their excess funds with the RBI. If reverse-repo rate increases, banks find it more profitable to keep its funds with RBI. Hence, lending activities decline (Reverse repo rate ↑ ⇒ money supply ↓). The current Reverse Repo rate is 5.75%.
  5. Bank rate: Bank rate is the rate at which RBI lends funds to the commercial banks. Unlike repo rate, there is no repurchase agreement in Bank rate. If this rate increases, it becomes expensive to borrow from the RBI. Therefore, banks increase its lending rates. Hence, lending activities decline. (Bank rate ↑ ⇒ money supply ↓) The current bank rate is 6.25%.

These are the monetary policy tools used by the Central bank. The RBI makes changes in these rates to control the money supply in the economy.

Further readings:

The Monetary Policy Committee Explained

 

 

Have any Question or Comment?

2 comments on “Repo, CRR, SLR, Reverse Repo, Bank Rate- Explained

Ecolegend

Lol, Bank rate is not the rate at which banks borrow from RBI. It is the rate at which the central bank rediscounts the bills of exchange from the commercial bank. The rate which you have described at which the RBI actually gives any such loan to the commercial banks is the MSF rate that is a specific percentage of the total demand and time liabilities.

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Mridusmita

Bank rate is the rate at which the banks borrow from the RBI. This lending is in the form of discounting/ rediscounting the Bills.
MSF rate is also the rate at which the banks borrow from the RBI. The mechanics of borrowing is the same as that of Repo, that is, through the repurchase of securities. However, the rate is above the repo rate. Banks can borrow funds up to one percent of their net demand and time liabilities (NDTL) under MSF. It is used when the banks have exhausted all other borrowing options and need emergency funds.

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