Most of us have seen monetary policy in the past where we often comes to hear that there has been a change in CRR, SLR, Repo rate, Reverse repo rate and so on. But still some people are not clear with these terms.
Let’s understand some of the key terms-
1.Bank rate– It is a rate at which central bank (RBI in India) lends money to the commercial banks. So any changes in bank rates indicate that supposedly the interest rates on your deposits are also going to be impacted thus indicating increase or decrease in your EMI.
2. Repo rate– It is the rate at which RBI lends short-term finances to the commercial banks against any securities. Now it stands at 6.00%
Hence when there is any decrease in repo rate, borrowings from RBI becomes expensive and vice versa.
3. Reverse repo rate– It is the rate at which these commercial banks deposits their excess short-term fund with the RBI. It is currently at 5.75%.
So any increase in reverse repo rate would imply that RBI would borrow funds from the banks at a higher interest rate and vice versa.
4. Cash Reserve ratio (CRR)– It is the portion of total deposits of customers which banks have to hold as reserves with the RBI.
So any increase in CRR would imply that lower funds are available with the banks and money is sucked out of the circulation.
Currently, the CRR rate in India stands at 4%.
5. Statutory Liquidity Reserve (SLR)– It is the percentage of total deposits of customers, which commercial banks have to hold as reserves with the central bank. Presently the SLR in India stands at 19.5%.
It restricts the bank’s leverage in pumping more money into the economy.
You can know more abput these five important banking terms by watching the video below:
I hope that next time you are seeing the monetary policy; you are in a better position to understand them.
You can give your feedback and specify any other doubt with regards to other related terms in the comment section.
Take care and keep learning!!