CRR, SLR, Repo rate, Bank rate, Reverse repo rate

In the last two knowledge sessions, we had covered two very important topics required to be studied by any bank aspirant. These were –

  1. Banking and its structure
  2. RBI & its role in the economy

In the continuation of the Knowledge Session, we will today look at the meaning of different terms related to monetary policy. RBI in order to control money supply in the economy makes changes in the following –

Cash Reserve Ratio: CRR is that proportion of a bank’s Net Demand and Time Liabilities (NDTL) that it has to keep as cash deposits with RBI. This proportion is specified by RBI and could change from time to time. As of December 2012, the CRR is 4.25 percent.

CRR is governed by the provisions of Section 42 of the Reserve Bank of India Act, 1934.

There is no minimum level of CRR. Similarly, there is no maximum. In theory, CRR can go upto 100%, which would mean RBI impounding the entire NDTL as a cash reserve.

Until the RBI Act was amended in 2007, the minimum value of CRR was statutorily fixed at 3% and the maximum was fixed at 20%. Both these limits (lower and upper) were removed by the amendment which came into effect in early 2007.

Higher the CRR with the RBI lower will be the liquidity in the system and vice-versa.

Statutory Liquidity Ratio: SLR is that proportion of a bank’s Net Demand and Time Liabilities (NDTL) that it has to maintain as investments in certain specified assets (cash, precious metals, and govt. approved securities like bonds). SLR is governed by the provisions of Section 24 of the Banking Regulation Act.

There is no minimum stipulation on SLR (earlier there used to be a minimum stipulated SLR of 25% – but this was removed with an amendment to the Banking Regulation Act in 2007).

However, SLR cannot exceed 40%.

Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. The current SLR is 23%.

Net Demand and Time Liability is the sum total of demand and time liability a bank owes. NDTL can be understood as total deposits a bank has.

Repo Rate or repurchase rate: Repo rate is the rate at which banks borrow money from RBI for short period by selling their securities (financial assets) to the central bank with an agreement to repurchase it at a future date at predetermined price. It is similar to borrowing money from a money-lender by selling him something, and later buying it back at a pre-fixed price.

Bank Rate is the rate at which banks borrow money from the central bank without any sale of securities. It is generally for a longer period of time. This is similar to borrowing money from someone and paying interest on that amount.

Both these rates are determined by the central bank of the country (RBI) based on the demand and supply of money in the economy.

Reverse Repo Rate: Reverse repo rate is the rate of interest at which the central bank borrows funds from other banks for a short duration. The banks deposit their short term excess funds with the central bank and earn interest on it.

Reverse Repo Rate is used by the central bank to absorb liquidity from the economy. When it feels that there is too much money floating in the market, it increases the reverse repo rate, meaning that the central bank will pay a higher rate of interest to the banks for depositing money with it.

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