Important Policy Rates in Banking System: Monetary Control Tools
Bank Rate, Repo Rate, Reverse Repo Rate, CRR, SLR, MSF.
Generally, banks borrow money from the central bank (RBI) based on some monetary standards whenever they fall in the shortage of funds.
Bank rate is nothing but the rate at which the commercial banks and other financial institutions get loans from RBI.
Repo Rate :
Repo rate is nothing but repurchase rate . The rate at which RBI lends money to the banking institutions against govt. securities.
The difference between Bank Rate and Repo Rate?
Bank Rate deals with loans whereas Repo Rate deals with repurchasing of securities with RBI. RepoRate is applicable for short term lending and Bank Rate is for long term lending.
Reverse Repo Rate:
Reverse Repo Rate is just opposite to Repo Rate. Here Banks deposits their excess amount of funds with RBI. For that, RBI provides some interest for their investment based on reverse repo rate.
Cash Reserve Ratio(CRR):
According to Monetary policies, Every bank in India is required to keep a certain proportion of their deposits in the form of cash with RBI. This minimum ratio is managed by RBI and is called as CRR.
For Example, If a bank’s deposit is increased by Rs. 100 and assume CRR is 6% then the bank has to keep Rs.6 with RBI and Rs.94 for its banking transactions such as lending, investments etc.,
Statutory Liquidity Ratio(SLR):
Every Banking Institution in India has to maintain a certain amount of its deposits in the form of liquid assets Such as cash, gold, other approved securities.
SLR means this minimum percentage of an amount required to maintain with the bank at the close of business every day.
MSF (Marginal Standing Facility):
Under which banks could borrow funds overnight from RBI against pledging govt. securities. Banks can borrow through MSF when there is the considerable shortfall of the liquidity.
It is the minimum rate below which banks are not permitted to lend.