Latest RBI bank rates (repo rate, reverse repo rate & key ratios) – 2018
It is the rate at which the central bank of a country (RBI 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.
When a commercial bank goes through financial crisis, they approach RBI. The interest at which banks borrow funds from RBI by selling their securities and bonds is called “Repo Rate”.
In this case, a repurchasing agreement is signed by both the parties stating that the securities will be repurchased on a given date at a predetermined price. For example: If the repo rate fixed by the RBI is 10% p.a and the amount borrowed by a bank from RBI is Rs 10,000, the interest rate to be paid by the bank to RBI is Rs 1,000.
Repo rate in India is fixed and monitored by RBI in India. It proves beneficial for short-term financial crisis. It is one of the powerful tools used by the central bank to control liquidity, money supply and inflation level in the country. If the economy needs less money supply, RBI increases the repo rate, making it difficult for banks to borrow funds.
Likewise, to pump funds into the system, the central bank may reduce the repo rate, encouraging banks to borrow funds.
Reverse Repo Rate
It is the interest rate offered by RBI to banks who deposit into its treasury. Simply put, when banks generate excess funds, they choose to deposit it with RBI which is safer than lending it to their account holders or other companies. The rate of interest earned by the depositing bank is called reverse repo rate. For example: If the reverse repo rate fixed by RBI is 5% p.a and the amount deposited by commercial banks into RBI’s account is Rs. 10,000, the interest rate by the depositing bank is Rs 500 p.a.
Reverse repo rate is a monetary policy instrument used by the RBI to control the supply of money in the nation. Also, there are chances when RBI falls short of money and asks the commercial banks to pitch in and offer them attractive reverse repo rates. It creates an opportunity for commercial banks and other leading financial institutions to make profits within a short period of time.
An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.
Open Market Operations (OMO)
Open market operations are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions. The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system. These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend. The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
Cash Reserve Ratio (CRR)
Banks in India are required to hold a certain proportion of their deposits in the form of cash (aka currency chests) with Reserve Bank of India. Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter in the form liquid cash.
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.
Statutory Liquidity Ratio (SLR)
Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities (mostly central government bonds and treasury bills). The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). RBI is empowered to increase this ratio up to 40%. An increase in SLR also restricts the bank’s leverage position to pump more money into the economy.
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.
Or Inter bank borrowing rate is the Interest Rate paid by the banks for lending and borrowing funds with maturity period ranging from one day to 14 days. Call money market deals with extremely short term lending between banks themselves. After Lehman Brothers went bankrupt Call Rate sky rocketed to such an insane level that banks stopped lending to other banks.
Marginal Standing facility (MSF) & Bank Rate
MSF is a special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash shortage. MSF rate is higher then Repo rate.
Bank Rate is the long term rate(Repo rate is for short term) at which 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.