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Reasons to know how bank rate affects a common man

To learn more about the relevance of the recent cut in Bank Rate to a common man, let us firstunderstand the working of a bank and its main functions of accepting deposits and giving loans.

Any bank accepts money from depositors and lends it back to borrowers at a higher rate of

interest to earn profit. But not the entire deposit amount is lent. The banks have to follow certainguidelines and regulations of RBI in this regard.

~Banks have to maintain ! "RR #"ash Reserve Ratio$ with the RBI. %o intetest is paid on

"RR.

~Also,banks have to buy&invest '(.)! of the deposits in the central&state govt.securities which isknown as *+R #*tatutory +iuidity Ratio$.

This way, out of every (--, only .)- are available with banks for profitable lending.₹ ₹

/owever, if needed, banks can also borrow from the RBI paying some interest at a rate which is

called Bank Rate. Till now, banks were paying 0.')! p.a.which has been revised to .)! w.e.f.'1&1&'-().

 %ormally,the interest rates of banks on deposits and loans change in tune with the Bank Rate.

*econdly, with a purpose to enhance&suee2e liuidity of funds in the banking system,the RBI

either purchases securities back from the banks giving them money3 or sells securities to them totake money out of the system. This is done at Repo Rate&Reverse Repo Rate which are presently

at 4.)&).)! p.a. respectively.

 

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Ta5 saving options

*o by reducing these rates, the RBI ensures that banks get money at cheaper rates and e5pects

them to reduce lending rates. That would enhance the business activities,create more 6obs,income

and boost the economy.

Also,when loans become cheaper,people tend to borrow more, spend more and demand forgoods increases. This may give a rise to inflation. But as inflation depends on so many other

factors also, like industrial and agriculture production, e5ports&imports, foreign currency

transactions etc.,it may be the other way round too.(

1 http://www.onnews.in/how-bank-rate-afects-a-common-man/