Common PO Exam Questions – What Is The CRR / SLR / Repo Rate / Reverse Repo Rate / What Are Their Current Rates In India

The RBI exercises an important role in controlling the money supply in the Indian economy. The measures also control the volume and cost of bank credit. Money supply change is used for controlling the economic situations caused by inflation and deflation by using one or more of the tools of monetary control like CRR, SLR, Bank rate etc. Monetary and credit policies are issued by RBI annually.

Cash Reserve Ratio (CRR): CRR represents the amount of funds that banks (scheduled and non- scheduled) are required to keep with RBI which is calculated as a certain percentage of their net demand time liabilities (NDTL). Demand liabilities are deposits which are payable on demand of the depositor which includes savings account, current account etc and Time deposits are those which is available to the depositor on maturity . eg; fixed deposit, recurring deposits. The CRR helps banks to meet these liabilities without fail as it ensures liquidity. If a bank fails to maintain this regulatory reserve at prescribed intervals it has to pay penal interest. A decrease in CRR will improve the money supply in the economy. An increase in CRR will reduce the liquidity in the banking sector and this will bring down the lending operations.

Statutory Liquidity Ratio (SLR): In addition to CRR, all scheduled and non- scheduled banks are required to maintain the statutory liquidity ratio which refers to the reserve in form of cash in hand, current account balances with SBI and other public sector commercial banks, unencumbered approved securities and gold. As per RBI SLR can range from 0 to 40 percent of bank’s DTL. SLR can control the expansion of banks’ credit, increase bank’s investment in approved securities and ensure solvency of banks. When SLR is increased money supply decreases. The reduction in lending activity will increase the lending rate as the demand for bank credit will increase. Money supply increases with reduction in SLR and this will bring an inflationary effect.

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Reverse Repo Rate:  It is the rate at which RBI borrows from commercial banks. An increase in reverse repo rate will prompt banks to park more funds with RBI as this will earn them more interest. This will lead to the reduction of money supply in the economy. A decrease in the reverse repo rate will increase the money supply.

Repo Rate: Repo rate is the rate at which RBI lends money to the commercial banks. In case of shortage of funds banks can borrow money from RBI. A decrease in repo rate will help banks to borrow at a lower rate whereas an increase will increase the cost of borrowing for banks. Thus repo rate acts as a tool of monetary control.

Let us look at the current rates prescribed by the RBI

The rates are updated on the RBI website www.rbi.org.in on a regular basis.

References: RBI Website
Principles and Practices of Banking, IIBF, published by MacMillan Publishers India Ltd