Definitions and New Rates of CRR, SLR, Repo Rate, Reverse Repo Rate

Definitions and New Rates of CRR, SLR, Repo Rate, Reverse Repo Rate. In the previous article, we have given complete details AS – 2 Inventory and AS – 6 Depreciation. Today we are providing the definitions and new rates of CRR (cash reserve ration), SLR (Statutory Liquidity Ratio), Repo rate, Reverse repo rate, and 5 Major differences between Repo Rate and Reverse Repo Rate. Check below !!

Cash Reserve Ratio(CRR)

Definition: It is the ratio of Deposits which banks have to keep with RBI. Under CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI. Banks don’t earn anything on that.

Banks will not have access to this amount. They cannot use this money for any of their economic or commercial activities. Banks can’t lend this portion of money to corporate or individual borrowers.

The current CRR is 4%. If RBI cuts CRR in its next monetary policy review then it will mean banks will be left with more money to lend or to invest. So, more money can be released into the economy which may spur economic growth.

Statutory Liquidity Ratio (SLR)

Definition: Besides CRR, Banks have to invest certain percentage of their deposits in specified financial securities like Central Government or State Government securities. This percentage is known as SLR.

This money is predominantly invested in government securities which mean the banks can earn some amount as ‘interest’ on these investments as against CRR where they do not earn anything.

Formula: SLR rate = (liquid assets / (demand + time liabilities)) × 100%

Time liabilities are liabilities which the banks are liable to pay after a certain period of time. E.g. A 1 year fixed deposit

Demand liabilities are liabilities which the banks are liable to pay on being demanded by the customer. E.g. A savings account

CRR limits the ability of the banks to pump more money into the economy. SLR is used to limit the expansion of bank credit, for ensuring the solvency of banks (even if all the loans by the bank go bad, the bank can still retrieve a part of it by selling the gold/govt securities.

The Current CRR & SLR rates are

Repo rate

Definition: It is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.

When banks need money they approach RBI. The rate at which banks borrow money from the RBI by selling their surplus government securities to the central bank (RBI) is known as “Repo Rate.” Repo rate is short form of Repurchase Rate. Generally, these loans are for short durations (up to 2 weeks).

It simply means the rate at which RBI lends money to commercial banks against the pledge of government securities whenever the banks are in need of funds to meet their day-to-day obligations.

Reverse Repo Rate

Definition: It is the rate of interest offered by RBI, when banks deposit their surplus funds with the RBI for short periods. When banks have surplus funds but have no lending (or) investment options, they deposit such funds with RBI. Banks earn interest on such funds.

Reverse repo rate is a monetary policy instrument used by RBI to control the supply of money in the nation. Also, there are chances when RBI falls short of money and asks the commercial banks to pitch in and offer them excellent reverse repo rates. It creates an opportunity to commercial banks and other leading financial institutions to make profits within a short period of time.

The current Repo & Reverse Repo Rates are

5 Major differences between Repo Rate and Reverse Repo Rate

• Repo rate is charged by RBI when commercial banks sell their securities. Whereas, reverse repo rate is the rate at which RBI borrows money from banks within the country.
• While high repo rate drains excess liquidity from the market as the banks have to pay high interest to obtain loan from RBI, high reverse repo rate injects liquidity into the economic system by offering high profits to banks.
• The repo rate is always higher than the reverse repo rate.
• While repo rate is used to control inflation, reverse repo rate is used to control money supply in the market.
• The main objective of repo rate is to deal with deficiency of funds. Whereas, reverse repo rate deals with liquidity in the economy.
• Repo Rate involves selling securities to RBI with a motive to repurchase it in the future at a fixed rate of interest but reverse repo rate is mere transferring of funds from one bank account to RBI account.

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