Key monetary tools at the RBI’s disposal

Key monetary tools at the RBI’s disposal

News:

1. Recently, the Reserve Bank of India (RBI) raised its repo rate by 25 basis points to 6.25%

Important facts:

2. Cash Reserve Ratio (CRR):

• The percentage of a bank’s total deposit that need to be kept as cash with the RBI
• A high percentage means banks have less to lend or invest
• A low percentage of CRR means more money to lend or invest
• RBI uses CRR to absorb excess liquidity or to release funds needed for economic growth.
• At present, the CRR is 4%. This means, if a bank’s deposits increase by Rs.100, 4%, the banks will have to keep Rs. 4 with the RBI. The bank can use only ₹96 for investments and lending purposes.

3. Statutory Liquidity Ratio (SLR):

• The percentage of banks’ total deposits that they are needed to invest in government approved securities. Banks can earn return on these investments.
• At present, the SLR is 19.5%. This implies, if a deposit of Rs.100 is made in a bank, then the bank will have to invest Rs. 19.5 in government securities

4. Repo rate:

• It is the rate at which RBI lends money to commercial banks against securities in case commercial banks fall short of funds.
• Higher the repo rate, the higher the cost of short-term money to the banks and vice versa.
• When the repo rate is lowered, banks can charge lower interest rates on the loans taken by borrowers.

5. Reverse Repo rate:

• The reverse repo rate is the rate of interest offered by RBI, when banks deposit their surplus funds with the RBI for short periods.
• At present, the reverse repo rate is 6%.