CRR, SLR, REPO RATE, REVERSE REPO RATE
CRR SLR Repo Rate Reverse Repo Rate
Cash and bank balance
Investment in securities
Investment in loans and advances
CRR Means Cash Reserve Ratio
Banks in India are required to hold certain proportion of their deposits in the term of cash or
cash equivalent.
Banks don’t hold these cash with themselves but they have to keep it reserved with central
bank account and it is on daily basis.
How much cash is to be kept with central bank?
The minimum ratio (of Net demand and time liability) is decided by the central bank i.e. rbi
in India, is known as CRR.
It doesn’t earn any income for bank as no interest is paid on that.
Example
Total net demand and time deposit of bank is 10000 cr
Cr is 5% (Assumed)
Cash balance =500 cr
Net fluctuates daily, so minimum % of it should be kept by bank with central bank.
If minimum % is let say 70% then 350 cr should be kept.
Increase in the bank deposits will lead to hold additional amount with central bank.
e.g. if bank deposits are increased by Rs.100 and crr is 6% then bank have to hold additional
Rs.6 with central bank. Bank will able to use only 94 Rs among them for any other investment
or lending purpose.
Thus, higher the ratio, lower is the amount that bank will be able to use for investment and
lending.
Current cr is 4.75%
It is to maintain economic stability and liquidity position. To control the amount of cash flow in
the market and to control the amount of which bank have for lending and investment.
Effects of increase or decrease in cr:
If it is reduced then it will increase liquidity position of bank. Bank has more money to invest
and lend and vice-versa.
SLR is Statutory Liquidity Ratio
“Statutory liquidity ratio (SLR) refers amount that the commercial banks require to
maintain in the form of gold or govt. approved securities before providing credit to the
customers. Here by approved securities we mean, bond and shares of different companies.”
It is determined and maintained by the RBI in order to control the expansion of bank credit.
It ensures solvency of commercial bank.
SLR is determined as the % of total demand and time liability.
Maximum slr is 40% and minimum is 24%.
Effect of Changes in SLR
Rate increase or decrease then it will change the fund investment pattern.
If increased, then banks will invest that money into the better earning resources rather than
investing in lower earning investment like govt. approved investment.
Repo Rate and Reverse Repo Rate
Repo Rate
It is the rate at which RBI lends short-term money to commercial banks against securities.
It is when banks have any shortfall of funds.
It is used by monetary authority to control inflation.
If repo rate increases then borrowing from RBI will become more expensive and vice-versa.
Current 8%
Reverse Repo Rate
Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India
in case of India) borrows money from commercial banks within the country.
It is a monetary policy instrument which can be used to control the money supply in the
country.
Current 7%
Reserve Bank of India (RBI) is the central bank of India, maintains monetary stability in
India. RBI uses monetary policy to maintain adequate flow of credit and price stability. It
uses various rates like CRR, Bank Rate, Repo Rate, Reverse Repo rate etc.
Repo Rate is the rate at which RBI lends money to the commercial Banks whereas Reverse
repo rate is the rate at which central bank borrows money from commercial banks. RBI
regulates both these rates to control the flow of money in the economy.
LAF stands for Liquidity adjustment facility. It helps banks to adjust their daily liquidity
mismatches through repurchase agreement. It was introduced by RBI during June, 2000. It
has two components.
Repo rate
Reverse Repo Rate
If banks have shortfall of fund, they borrow from the RBI and if Banks have excess of money
then they lend it to RBI. Here, lending and borrowing is for the short-term. Rate at which
RBI lends money to other banks is called Repo rate and rate paid by RBI on borrowing
amount is called Reverse Repo Rate.
It is regulated by RBI.
Marginal Standing Facility abbreviated as MSF, is the rate at which scheduled banks could
borrow funds overnight from RBI against government securities. It is last resort for banks
once they exhaust all options of borrowing.
This rate is higher than the Repo rate under LAF.
It is also controlled by RBI.
