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Repo rate
Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.
Repo rate is used by monetary authorities to control inflation.
It comes under Liquidity Adjustment Facility (LAF) of RBI monetary policy .
Banks borrow money by repo to meet their daily mismatches.
Repo auctions are conducted by RBI on a daily basis, except Saturdays. Here, minimum bid size is of Rs. 5 crore and multiple.
Repo borrowings have a tenure of 1 day to 90 days.
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.
An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant.
5 Major differences between Repo Rate and Reverse Repo Rate
- Repo rate is charged by RBI when commercial banks sell their securities. Whereas, reverse repo rate is the rate at which RBI borrows money from banks within the country.
- While high repo rate drains excess liquidity from the market as the banks have to pay high interest to obtain loan from RBI, high reverse repo rate injects liquidity into the economic system by offering high profits to banks.
- The repo rate is always higher than the reverse repo rate.
- While repo rate is used to control inflation, reverse repo rate is used to control money supply in the market.
- The main objective of repo rate is to deal with deficiency of funds. Whereas, reverse repo rate deals with liquidity in the economy.
- Repo Rate involves selling securities to RBI with a motive to repurchase it in the future at a fixed rate of interest but reverse repo rate is mere transferring of funds from one bank account to RBI account.
Cash Reserve ratio
The Cash Reserve Ratio is the amount of funds that the banks are bound to keep with Reserve bank of India as a portion of their Net Demand and Time Liabilities (NDTL).
Net Demand Liabilities – Bank accounts from which you can withdraw your money at any time like your savings accounts and current account.
Time Liabilities – Bank accounts where you cannot immediately withdraw your money but have to wait for certain period. e.g. Fixed deposit accounts.
The objective of CRR is to ensure the liquidity and solvency of the Banks.
The CRR is maintained fortnightly average basis.
When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for investments and lending, credit purpose. Therefore, higher the ratio, the lower is the amount that banks will be able to use for lending and investment. This power of Reserve bank of India to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend.
Thus, it is a tool used by RBI to control liquidity in the banking system.
Reserve Bank does not pay any interest on the CRR balances.
Bank Rate
This is the long term rate(Repo rate is for short term) at which central bank (RBI) lends money to other banks or financial institutions.
Bank rate is not used by RBI for monetary management now.
It is now same as the MSF rate.
Banks doesn’t need any collateral or security, while borrowing for a long term under Bank Rate.
Marginal Standing Facility (MSF)
It is a special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash shortage.
The MSF was introduced by the RBI in its monetary policy for 2011-12 after successfully test firing it from December 2010 onwards.
MSF rate is higher then Repo rate.
- Tenor and Amount: Under the facility, the eligible entities can avail overnight, up to one per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight.
- Timing: The Facility will be available on all working days in Mumbai, excluding Saturdays.
- Rate of Interest: The rate of interest on amount availed under this facility will be 100 basis points above the LAF repo rate, or as decided by the Reserve Bank from time to time.
- Discretion to Reserve Bank: The Reserve Bank will reserve the right to accept or reject partially or fully, the request for funds under this facility.
- Mechanics of operations: i) The requests will be submitted electronically in the Negotiated Dealing System (NDS). Eligible members facing genuine system problem on any specific day, may submit physical requests in sealed cover in the box provided in the Mumbai Office,
- Minimum request size: Requests will be received for a minimum amount of Rs. one crore and in multiples of Rs. one crore thereafter.
Statutory Liquidity Ratio
SLR is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved liability (deposits). It regulates the credit growth in India.
The liabilities that the banks are liable to pay within one month’s time, due to completion of maturity period, are also considered as time liabilities. The maximum limit of SLR is 40% and minimum limit of SLR is 0 In India, Reserve Bank of India always determines the percentage of SLR.
