What is Repo Rate,Reverse Repo Rate, CRR & SLR?
What is Repo Rate?.
Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.
A reduction in the repo rate helps banks get money at a cheaper rate and vice versa. The repo rate in India is similar to the discount rate in the US.
Determinants of Repo Rate :
The repo rate for a particular transaction depends on the following factors:
- Credit quality: like most other securities, the interest rate varies inversely with the credit quality of the issuer—the higher the credit quality, the lower the repo rate.
- Liquidity: greater liquidity lowers trading costs and, therefore, the repo rate.
- Delivery: if the collateral must be physically delivered, the lender will charge a higher repo rate to cover its cost.
- Collateral availability: if the collateral is a special issue that is hard to get, the seller of the collateral will be able to obtain a lower repo rate from a lender that needs the collateral.
What is Reverse Repo rate?
Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest.
An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.
What is CRR ?.
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI. If the central bank decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excessive money from the system. Commercial banks are required to maintain with the RBI an average cash balance, the amount of which shall not be less than 3% of the total of the Net Demand and Time Liabilities (NDTL), on a fortnightly basis and the RBI is empowered to increase the rate of CRR to such higher rate not exceeding 20% of the NDTL.
What is SLR ?.
SLR Pertains to Statutory Liquidity Ratio, which is an Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined by Reserve Bank of India maintained by banks in order to control the expansion of bank credit.
The SLR is determined by a percentage of total demand and time liabilities. Time Liabilities refer to the liabilities which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon, and demand liabilities are such deposits of the customers which are payable on demand. An example of time liability is a six month fixed deposit which is not payable on demand but only after six months. An example of demand liability is a deposit maintained in saving account or current account that is payable on demand through a withdrawal form such as a cheque.
The current Key Indicators are :
Repo Rate – 6.0%
Reverse Repo Rate – 5.75%
CRR – 4%
SLR – 20%
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