Topic 3: Monetary Policy of RBI
Basically this is a policy which controls and regulates the supply of money in the Indian economy. This policy is a tool used to influence interest rates, inflation, and credit availability through changes in the supply of money available in the economy. In India it is also called the Reserve Bank of India’s ‘Credit Policy’ as the stress is primarily on directing and controlling credit. Monetary policy is revised from time to time by the RBI keeping the needs of the economy in mind. Monetary policy gives the economy the desired direction by policy makers.
What are Repo rate and Reverse Repo rate?
Repo rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive.
The reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI.
Current Repo Rate: 7.25%
Current Reverse Repo Rate: 6.25%
What is 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. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 23%. RBI is empowered to increase this ratio up to 40%.
What is CRR?
All scheduled commercial banks are required to maintain a fortnightly minimum average daily cash reserve equivalent with RBI. This is 3% of its Net Demand and Time Liabilities (NDTL) outstanding as on the Friday of the previous week. But the apex bank is empowered to vary this ratio between 3 and 15 per cent.
RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation.
Current CRR: 4%
What is Bank rate?
Bank Rate is the rate at which RBI allows finance to commercial banks. Bank Rate is a tool, which RBI uses for short-term purposes. Any revision in Bank Rate by RBI is a signal to banks to revise deposit rates as well as Prime Lending Rate. This could mean more or less interest on our deposits and also an increase or decrease in our EMI. The interest charged by banks on loans can rise or fall according to the Bank rate.
Currnet Bank Rate: 10.25%