You must have heard two statements like “RBI increased Repo Rates and CRR” or “RBI Cuts Repo Rate”, what does it mean? Well, here is the answer. Below is detail guide on what are CRR, SLR, Repo Rate and Reverse Repo Rate. Before we go to the above mentioned definitions in depth, let me tell you that all the above mentioned rates are controlled by RBI (Reserve Bank of India).
Why RBI Keep Increasing/Decreasing CRR, SLR, Repo Rates?
Well, to control flow of money and inflation in the country, RBI keep tracking the Growth rate and inflations via industries production using different tools. Those tools like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo Rate, Reverse Repo Rates, are being used by RBI to control and to give boost to Indian economy & to control inflation rate in the country.
So, today we are learning about all the tools used by RBI to control inflation and to keep track of growth of the Indian economy.
CRR (Cash Reserve Ratio)
Whenever you deposit some money in bank, mostly bank use those money to land someone and ears handsome interest on those money (and very few part of interest earned by bank is transferred to you). But also, banks have to put some money for RBI too. The money goes to RBI is not being used by banks for commercial purpose.
So, when you Deposit Rs.1000 in your bank account, and current CRR Rate is 4% than Bank has to keep Rs.40 for RBI. And Bank left with Rs.960 (which they can use it for commercial purpose). Every six months, RBI keep update the Policy rates, and depends on that CRR rates are decided.
So, now you must have understood what CRR is and what it means by cutting and increasing the CRR rates by RBI.
Statutory Liquidity Ratio (SLR)
Whatever money deposit bank has, of out that money, Bank has to deposit some of the money in Government securities (to maintain funds for the government projects). But Unlike CRR (Where banks does not receive any interest rate), the money deposited under SLR, bank will receive interest rates from government too.
So, if the current SLR Rate is 20% and you deposited Rs.1000 under your saving account, Bank has to pass on Rs.200 (20% of Rs.1000) under SLR law to government deposit. And Bank has to keep deposit some money under SLR and CRR to RBI and Govt of india. So, now total Rs.40+Rs.200 of Rs.1000 bank deposit has been submitted to government and Bank has (Rs.40+Rs.200 – Rs.1000) Rs.760 in their hand, which they can use it for commercial purpose.
When we need loan, we approach to Banks, but what if bank is short of money (Due to liquidity issue), where they will Go? Simple, to the Central Bank. Whenever, banks need money, they will access RBI.
At the rate which RBI lands money to other bank is called Repo Rate. In short, Repo rate is interest rate at which RBI lands money to your Bank. RBI Increase/decrease Repo rate on the basis of Basic Rates.
RBI does not land money for long time, as mentioned above, RBI only land money to banks to maintain liquidity, And that needed for short time only. So, mostly RBI gives loan to banks for 1-2 weeks only. After that time, Bank buys government securities in favour of money they got from RBI.
So, if the current repo rate is 5% and a bank takes Rs.10000 of loan from RBI, they have to pay Rs.500 of interest rate.
Reverse Repo Rate
Mostly, banks use money deposited in their banks for commercial purpose. Bank gives so many type of loan like vehical loan, education loan, home loan etc. But what if bank has money buy no Loan takers?
In that case, Bank can deposit money to RBI. And in return, RBI will give interest to Banks. So, its just reverse of Repo Rate. In repo rate, banks pay interest to RBI, in reverse repo rate, RBI pays interest to Banks.
So exactly, Reverse Repo Rate is nothing but at the rate Banks lands money to RBI. Don’t get confuse between CRR and RRR. CRR is compulsory thing, which every bank has to follow, while RRR will be only paid when banks deposit money to RBI.
So for example, current reverse repo rate is 5% and SBI bank deposit Rs.1000 to RBI, RBI will pay Rs.50 to SBI. Only surplus money of commercial bank will be deposited to RBI.
How does cutting / increasing such rates impact Indian economy?
Whenever RBI Cuts the repo rate, which means they are giving loan to commercial banks at lower rate. Which means people who are borrowing money from RBI will also get loan at lower rate. And which means more business loan, more employment. At higher rate of interest, very few people can afford and start business.
These are the short description of CRR, SLR, Repo rate, and Reverse Repo Rate. Hope we have explained it better. For more updates, on financial information, keep visiting Best Term Plan.