QWhat is repo rate and
reverse repo rate?
A
Repo or repurchase
option is a means of short-term borrowing, wherein banks sell approved
government securities to RBI and get funds in exchange. In other words, in a
repo transaction, RBI repurchases government securities from banks, depending
on the level of money supply it decides to maintain in the country's monetary
system.
Repo rate is the discount rate at which banks borrow from RBI. Reduction in repo rate will help banks to get money at a cheaper rate, while increase in repo rate will make bank borrowings from RBI 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.
Reverse repo is the exact opposite of repo. In a reverse repo transaction, banks purchase government securities form RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest.
Thus, repo rate is always higher than the reverse repo rate.
Source: sptulsian.com
Repo rate is the discount rate at which banks borrow from RBI. Reduction in repo rate will help banks to get money at a cheaper rate, while increase in repo rate will make bank borrowings from RBI 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.
Reverse repo is the exact opposite of repo. In a reverse repo transaction, banks purchase government securities form RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest.
Thus, repo rate is always higher than the reverse repo rate.
Source: sptulsian.com
QWhat are CRR and SLR
with respect to banks?
A
CRR or cash reserve
ratio is the minimum proportion / percentage of a bank’s deposits to be held in
the form of cash. Banks actually don’t hold these as cash with themselves, but
deposit the same with RBI / currency chests, which is considered equivalent to
holding cash with themselves.
When a bank’s deposits increase by Rs. 100 crore, and considering the present cash reserve ratio of 6%, bank will have to hold additional Rs. 6 crore with RBI and will be able to use only Rs. 94 crore for investments and lending. Therefore, higher the CRR, lower the amount that banks can lend. Thus RBI can control the liquidity by changing the CRR i.e. increase CRR to reduce the lendable amount and vice-versa.
SLR or statutory liquidity ratio is the minimum percentage of deposits that a bank has to maintain in form of gold, cash or other approved securities. It is the ratio of liquid assets (cash and approved securities) to the demand and term liabilities / deposits.
RBI is empowered to increase this ratio up to 40%. An increase in SLR restricts the bank’s leverage position to pump more money into the economy, thereby regulating credit growth.
Source: sptulsian.com
When a bank’s deposits increase by Rs. 100 crore, and considering the present cash reserve ratio of 6%, bank will have to hold additional Rs. 6 crore with RBI and will be able to use only Rs. 94 crore for investments and lending. Therefore, higher the CRR, lower the amount that banks can lend. Thus RBI can control the liquidity by changing the CRR i.e. increase CRR to reduce the lendable amount and vice-versa.
SLR or statutory liquidity ratio is the minimum percentage of deposits that a bank has to maintain in form of gold, cash or other approved securities. It is the ratio of liquid assets (cash and approved securities) to the demand and term liabilities / deposits.
RBI is empowered to increase this ratio up to 40%. An increase in SLR restricts the bank’s leverage position to pump more money into the economy, thereby regulating credit growth.
Source: sptulsian.com
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