Policy Rates and Ratios-- Bank Rate, Repo rate, Reverse Repo Rate,CRR,SLR

According to RBI the rates and ratios are as follows right now-

Bank Rate- 6%

Repo Rate- 5.25%

Reverse Repo Rate-3.75%

CRR- 6%

SLR- 25%

Policy Rates consist of Bank rate, repo rate, reverse repo rate.

Bank Rate-- Bank Rate is defined as the rate at which central bank of the country allows finance to commercial banks. Bank rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate. This any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI. Simply we can say that this is the rate at which central bank (RBI) lends money to other banks or financial institutions.   If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it can said that in case bank rate is hiked, in all likelihood banks will hikes their own lending rates to ensure and they continue to make a profit.  

Repo Rate—Repo Rate is also known as repurchase rate. It 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.  Therefore, we can say that in case,  RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate-- It is the rate at which banks park their short-term excess liquidity with the RBI.  The RBI uses this tool when it feels there is too much money floating in the banking system.  An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.

Reserve Ratios are of 2 types-

CRR (Current Reserve Ratio) -- CRR means Cash Reserve Ratio.  Banks in India are required to hold a certain proportion of their deposits in the form of cash.  However, actually Banks don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivalent to holding cash with themselves.. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio.  Thus, when a bank’s deposits increase by Rs1000, and if the cash reserve ratio is 9%, the banks will have to hold additional Rs 90 with RBI and Bank will be able to use only Rs 910 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment.  This power of RBI 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.

SLR (Statutory Liquidity Ratio) -- This term 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 to liabilities (deposits) it regulates the credit growth in India.