Repo Rate– Repo rate is the rate at which banks borrow money from the RBI to meet their deficiencies. When the banks fall short of funds, the RBI lends money to the commercial banks at a certain interest rate which is called as repo rate. The banks mortgage their government bonds as collateral security to borrow from Reserve Bank of India. Repo rate is used as a tool by monetary authorities to control inflation. When inflation strikes, RBI increases repo rate as this acts as a hindrance for banks to borrow. This ultimately reduces the money supply in the economy and thus helps in controlling inflation. If the Reserve Bank wants to make it more expensive for the banks to borrow money, it increases the repo rate. Likewise, if it wants banks to borrow more money, it reduces the repo rate.
For example, an increase in the reverse repo rate will decrease the money supply in the banks. An increase in reverse repo rate means that commercial banks will get more returns on their idle funds by borrowing it to the RBI, thus decreasing the supply of money in the market.
Current Reverse Repo Rate-6%
Cash Reserve Ratio– Cash reserve ratio (CRR) is generally defined as a particular minimum amount of deposits that needs to be maintained as a reserve by every commercial bank in India according to the requirement of the RBI. The CRR will be fixed as per the rules and regulations of the RBI. It is usually considered that such a part of bank deposits is totally risk-free. It is actually a certain percentage of bank deposits which banks are bound to keep with RBI in the form of reserves. It supports the RBI in controlling the liquidity in the banking system. Besides, it helps to curb the inflation as well.
Current Cash Reserve Ratio-4%
Statutory Liquidity Ratio (SLR)- Statutory Liquidity Ratio refers to the proportion of deposits the commercial bank is required to maintain with them in the form of liquid assets in addition to the cash reserve ratio. As per the RBI, the Banks have to maintain the ratio of the liquid assets to time and demand liabilities in the form of liquid assets like cash, precious metals, government bonds or government approved securities.
The statutory liquidity ratio is determined by the central bank as the percentage of total demand and time liabilities.
The objective of statutory liquidity ratio is to prevent the commercial banks from liquidating their liquid assets during the time when CRR is raised.
A penalty at a rate of 3% per annum above the bank rate is imposed if any commercial bank fails to maintain the statutory liquidity ratio.
Current Statutory Liquidity Ratio-19.5%
Marginal Standing Facility (MSF)- Marginal Standing Facility is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12) and refers to the reformatory rate at which banks can borrow money from the central bank over and above what is available to them.
MSF is always fixed above the repo rate as it is the last refuge for the banks. Once the banks exceed all borrowing options including the liquidity adjustment facility by pledging government securities, MSF is the last substitute rate where the banks can borrow. MSF would be a penal rate for banks and the banks can borrow funds by pledging government securities within the limits of the statutory liquidity ratio. The scheme has been introduced by RBI with the main aim of reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.
Inflation -Inflation is defined as a sustained increase in the general level of prices for goods and services in a country and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. In India, inflation is measured based upon the Indian consumer price index. The index is basically a measure of the average price that consumers spend on goods and services around the year.
Inflation based consumer price index (CPI) is the main inflation indicator practiced in most of the countries.