RBI Policy Rates and Reserve Ratio

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The central bank, RBI, which fixes all the policy rates for banks, has made few changes to these rates on 17^th April 2012. The details of these policy rates, the new rates and the previous rates are given below.

Bank Rate: Bank rate is the rate at which commercial banks borrow short-term loans from RBI. An increase in bank rate by central bank indicates that banks should also increase long-term interest rates. If RBI hikes the bank rate, the interest that a bank pays for borrowing funds also increases. So, the bank in turn increases its own lending rates to its borrowers to make a profit. Thus, any revision in the bank rate by RBI, the effect will be shown on the commercial banks.

Repo Rate: Whenever banks have shortage of funds they can borrow funds from RBI by selling their securities (usually bonds) with an agreement to repurchase the same at a predetermined rate and date. Repo rate is the repurchase rate at which commercial banks borrow funds from RBI. If RBI wants to make it cheaper for banks to borrow funds, it reduces the repo rate. Similarly, if it wants to make it expensive for banks to borrow funds, it increases the repo rate.

You may find similarities between these two rates as both the rates are used by RBI to control cash flow in the market. But the difference between repo rate & bank rate is that both these rates differ in terms of need for securities submission. Repo rate requires the securities to be submitted, whereas, bank rate does not.

Reverse Repo Rate: Reverse Repo rate is the rate at which RBI borrows money from commercial banks. An increase in Reverse Repo rate can prompt banks to transfer more funds to RBI to earn high returns on idle cash. Since the funds can be in safe hands earning a good interest, banks are always happy to lend funds to RBI.

RBI has also made changes to the reserve ratios few days back. Here are the details of these ratios.

CRR Rate: Cash Reserve Ratio (CRR) is the amount of funds that the banks are required to deposit in cash with RBI. An increase in CRR rate indicates that the available amount of funds with the banks comes down. The higher the CRR, the lower the amount of money that banks use for lending or investment. RBI uses CRR in order to drain out excess funds from banks.

SLR Rate: Statutory Liquidity Ratio (SLR) indicates the ratio of liquid assets to demand and time liabilities. Every bank is required to maintain a minimum proportion of demand and time liabilities as liquid assets in the form of cash, gold and approved securities.

Policy rates as on April 17^th 2012		Previous rate
Bank Rate	9.00%	9.50% (continuing since 13^th February 2012)
Repo Rate	8.00%	8.5% (continuing since 25^th October 2011)
Reverse Repo Rate	7.00%	7.5% (continuing since 25^th October 2011)
Reserve Ratios as on April 17^th 2012
CRR Rate	4.75% (was into effect from 10^th March 2012)	5.5% (continuing since 24^th January 2012)
SLR Rate	24.00% (was into effect from 18^th Dec 2010)	25% (continuing since 7^th November 2009)