Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and interest rates. By using this financial tool RBI have control inflation rate. The cash reserve ratio is also known as the cash asset ratio or liquidity ratio.
What is Repo Rate???
Whenever the banks have shortage of funds they can barrow it from RBI. The rate at which the RBI lends money to commercial banks is called repo rate. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.The repo rate in India is similar to the discount rate in the US.
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.Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man.
What is statutory liquidity ratio(SLR)???
SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit.
How is SLR determined???
SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand.
What is the need of SLR???
With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds. SLR is used to control inflation and propel growth. Through SLR rate tuning the money supply in the system can be controlled efficiently.
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What is the need of SLR???
With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds. SLR is used to control inflation and propel growth. Through SLR rate tuning the money supply in the system can be controlled efficiently.
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THANKS & REGARDS E-mail-- nsebsenow@gmail.com
NSEBSENOW
