CRR, SLR, BANK RATE, REPO, REVERSE REPO

What is CRR?   

CRR means Cash Reserve Ratio.  Banks in India are required to hold a certain proportion of their deposits in the form of  cash.  However, actually Banks  don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as  equivalent to holding cash with RBI. This minimum ratio (that is the part of the total deposits  to be held as cash) is stipulated by the RBI and is known as the CRR or  Cash Reserve Ratio.

Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 6%, the banks will have to hold additional Rs 6 with  RBI and Bank will be able to use only Rs 94 for investments and lending / credit purpose. Therefore,  higher the  ratio (i.e. CRR), the lower is the amount that banks will be able to  use for lending and investment.  This power of RBI to reduce the lend able 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.  Thus, it is a tool used by RBI to control liquidity in the banking system.

How RBI uses CRR?  

RBI uses CRR either to drain excess liquidity or to release funds needed for the growth of the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation.

Thus we can say that this serves duel purposes i.e.

(a)  Ensures that a portion of bank deposits is kept with RBI and is totally risk-free, 

(b) Enables RBI to  control liquidity in the system, and thereby, inflation by tying the  hands of the banks in lending money.

CRR FOR THE PAST 4 YEARS.:

                       DATE                     RATES

24-Apr-2010	6.00	RBI circular dated 20/04/2010
28-Jan-2012	5.50	RBI circular dated 24/01/2012
10-March-2012	4.75	RBI circular dated 10/3/2012
22nd September, 2012	4.50	RBI circular dated 17/09/2012
3rd November 2012	4.25	RBI circular dated 30/10/2012
9th February 2013	4.00	RBI  circular dated 29/01/2013

                         CRR IS DECREASING.......FROM PAST 4 YEARS

What is SLR?

  

Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).

How RBI uses SLR?  

RBI is empowered to increase this ratio up to 40%.  An increase in SLR  also restrict the bank’s leverage position to pump more money into the economy.

SLR FOR THE PAST 5 YEARS.:

                          DATE                     RATES
             7-Nov-2009                         25 %
          18-Dec-2010                          24 %
          11-Aug-2012                          23 %
         14-June-2014                         22.5 %

                         SLR IS DECREASING.......FROM PAST 5 YEARS

What are Repo rate and Reverse Repo rate?

 Repo rate

 Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks against securities. 

How RBI uses REPO rate?  

When the repo rate increases borrowing from RBI becomes more expensive.  Therefore, we can say that in case,  RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

 Reverse Repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. 

How RBI uses Reverse REPO rate?  

 The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns.     An increase in the reverse repo rate  means that the RBI is ready to borrow money from the banks at a higher rate  of interest. As a result, banks would prefer to keep more and more surplus funds with RBI.

*Reverse Report rate was an independent rate till 03/05/2011.  However, in the monetary policy announced on 03/05/2011, RBI has decided that now onwards the Reverse Repo Rate will not be announced separately, but will be linked to Repo rate and it will always be 100 bps below the Repo rate (till RBI decides to delink the same)

REPO RATE FROM MAY 2013..

                        DATE                     RATES

3 - May 2013	7.25	RBI circular dated 3/5/2013
20 - September- 2013	7.50	RBI circular dated 20/9/2013
29 - October- 2013	7.75	RBI circular dated 29/10/2013
28 - january- 2014	8.00	RBI circular dated 28/01/2014

REVERSE REPO RATE FROM MAY 2013..

                                      DATE                                RATES

03-May-2013	6.25	RBI circular dated 03/05/2013
20-September-2013	6.50	RBI circular dated 20/09/2013
29-October-2013	6.75	RBI circular dated 29/10/2013
28-January-2014	7.00	RBI circular dated 28/01/2014

What is Bank rate?

   

 Bank Rate is the rate at which central bank of the country  (in India it is RBI)  allows finance to commercial banks. Bank Rate is a tool, which central bank  uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Base Rate / Benchmark Prime Lending Rate.  Thus any revision in the Bank rate indicates that it is likely that interest rates on your deposits are likely to either go up or go down,  and it can also indicate  an increase or decrease in your EMI.