There has been a lot of buzz in the news about cutting down the repo rates, bank rates, SLR, CRR etc. to control the money supply in the market. We already know that cutting down the rates would increase the money with the commercial banks which can lend the same to the investors who in turn boost the economy with their investments. Also there would be an increase in the private and public consumption. This process is called quantitative easing. Now the question is what are these ratios.
- Cash Reserve Ratio (CRR) – The ratio of the total deposits of the customers that is needed to be kept with the RBI by the commercial banks in the form of cash in the current account maintained with the RBI.
Reason : To ensure that commercial banks can meet the withdrawal of funds by the customers. To prevent shortage of funds.
- Statutory liquidity Ratio (SLR) – The ratio of the total deposits of the customers that is needed to be kept with the RBI by the commercial banks in the form of cash, gold or other approved securities.
Reason : To maintain liquidity of the banks and to control the money supply in the market by tweaking the ratios.
Difference with CRR : CRR consists only cash vs. SLR which includes cash and other securities mentioned by RBI. The objectives are also different.
- Bank Rate – The rate at which RBI lends money to the commercial banks without asking for any collateral.
- Repo Rate – The rate at which RBI lends money to the commercial banks while taking collateral. It is generally 100 basis points lower than the bank rate. Actually it is a kind of repurchase agreement where a commercial bank sells its asset to the RBI with the intention of buying it back at a specified future date. Repurchase price is always more than the selling price. The difference in both is the resultant interest which is expressed in the form of repo rate.
- Reverse Repo Rate – Similar to above but parties are changed i.e. where RBI asks for money from the commercial banks.
- Marginal Standing Facility (MSF) – This was introduced by RBI in the year 2011-12. This facility is used for overnight borrowing, by the commercial banks from the RBI, when inter-bank borrowing is very much difficult due to low liquidity. Most of the time this rate is equal to the bank rate.