tools of monetary policy

TOOLS OF MONETARY POLICY

CASH RESERVE RATIO

STATUTORY

LIQUIDITY RATIO

REPO RATE

REVERSE REPO

RATE BANK

RATE

1. CASH RESERVE RATIOCash Reserve Ratio (CRR) is a specified minimum

fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.

CRR is set according to the guidelines of the central bank of a country.

Current CRR is 4%.

2. STATURTORY LIQUIDITY RATIO SLR stands for 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. 

Current SLR is 21.5%.

3. REPO RATERepo rate also known as the benchmark interest rate is the

rate at which the RBI lends money to the banks for a short term.

When the repo rate increases, borrowing from RBI becomes more expensive. If 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.

Current Repo Rate is 6.75%.

4. REVERSE REPO RATEReverse Repo rate is the short term borrowing rate at

which RBI borrows money from banks. The Reserve bank 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 banks will get a higher rate of interest from RBI.

As a result, banks prefer to lend their money to RBI which is always safe instead of lending it others which is always risky. 

Current Reverse Repo Rate is 5.75%.

5. BANK RATEBank rate in India is determined by Reserve

Bank of India (RBI). It is the rate at which RBI gives loan to commercial banks without keeping any collateral.

6. Prime Lending Rate (PLR)The interest rate charged by banks to their

largest, most secure, and most creditworthy customers on short-term loans. This rate is used as a guide for computing interest rates for other borrowers.

CONCLUSION

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