The Reserve Bank of India (RBI),
on Tuesday 7th April 2015, kept the short-term policy rate (repo) unchanged at 7.50 per cent in its first bi-monthly monetary policy for fiscal 2015 -16. The
central bank said it would wait for banks to pass on rate cuts that have
already been announced before it looks for further easing.
Earlier, RBI had unexpectedly reduced the policy rate by 25 basis points on 4
March-the second such cut outside a scheduled monetary policy review since
January. The first rate cut of the cycle had been announced on 15 January. One
basis point is one-hundredth of a percentage point.
About RBI policy rates:
1. Repo Rate – It is the rate at
which RBI lends money to the commercial banks in the event of any shortfall of
funds.
Note: i. Repo rate is used by
monetary authorities to control inflation.
ii. A reduction in the
repo rate will help banks to get money at a cheaper rate. When the repo rate
increases, borrowing from the central bank becomes more expensive
iii. REPO rate is the
rate of interest which RBI implements on the short term loans, i.e., from a
period ranging between 2 days to 3 months (90 Days).
2. Reverse Repo Rate – It is the rate at
which RBI borrow money from commercial banks.
Note: i. It is a monetary
policy instrument which can be used to control the money supply in the country.It
is mostly done when there is surplus liquidity in the market.
ii. Reverse repo rate is
always lower than the repo rate.
3. Bank Rate – Bank rate is the rate
of interest implemented by RBI when it lends money to a public sector bank for
the long term basis, i.e. from a period ranging from 90 days to 1 year.
Or Bank rate, also referred to as the discount rate, is the rate of
interest which a central bank charges on the loans and advances to a commercial
bank.
Note: Please note that
Bank Rate and Repo Rate seem to be similar terms because in both of them RBI
lends to the banks. However, Repo Rate is a short-term measure and it refers to
short-term loans and used for controlling the amount of money in the market,
Bank Rate is a long-term measure and is governed by the long-term monetary
policies of the RBI.
4. MSF (Marginal
Standing Facility) – It is the rate at which banks borrow funds overnight from the Reserve
Bank of India (RBI) against approved government securities.
Note: MSF came into
effect in May 2011. Under the Marginal Standing Facility (MSF), currently banks
avail funds from the RBI on overnight basis against their excess statutory
liquidity ratio (SLR) holdings.
About RBI reserve
rates:
1. CRR (Cash Reserve
Ratio) – It is the amount of funds that the banks have to keep with the RBI.
2. Note: 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.
3. SLR (Statutory Liquidity
Ratio) – (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.
Note: SLR rate is
determined and maintained by the RBI (Reserve Bank of India) in order to
control the expansion of bank credit.
Current Rates are as follows:
1. Repo Rate – 7.50% (unchanged)
2. Reverse Repo Rate – 6.50% (unchanged)
3. CRR (Cash Reserve ratio) – 4% (unchanged)
4. Bank Rate – 8.50% (unchanged)
5. MSF (Marginal Standing Facility) – 8.50%
(unchanged)
6. SLR (Statutory Liquidity Ratio) – 21.50%
(unchanged)