To control rising inflation and to keep a check on the growth are considered to be one of key functions of the RBI and to do that the Central Bank uses certain tools.
The Reserve Bank of India in its October policy review has decided to maintain the status quo. The Central Bank on Wednesday kept its key lending rate—the repo rate—unchanged at 6%, dashing hopes of lower borrowing costs for households and the companies ahead of the festival season.
The six member monetary policy committee (MPC), chaired by RBI governor Urjit Patel, decided ti maintain the status quo by 5:1.
In its August policy review, it had trimmed down the the repo rate by 25 basis points to 6% .The repo rate is the rate at which banks borrows from RBI.
But before you get all confused we have explained in details the key rates:
To control rising inflation and to keep a check on the growth are considered to be one of key functions of the RBI and to do that the Central Bank uses certain tools
like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo Rate and Reverse Repo Rate.
What is CRR?
Cash reserve Ratio (CRR) is the amount that the banks have to keep with the RBI. If the central bank increases the CRR, the available amount with the banks gets lower.
The RBI uses the CRR to take out excessive money from the economic system. The current CRR rate is 4%. If RBI cuts CRR in its tomorrow's monetary policy then
that would led to gain in lending, investing power of the banks.
What is Statutory Liquidity Ratio (SLR)?
Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. An increase in reverse repo rate can prompt banks to park more funds with the RBI
to earn higher returns on cash.
The money that has been deposited by the commercial banks has to be predominantly invested in government approved securities (bonds), Gold.
The key difference between the SLR and CRR is that under SLR banks earn returns on their cash that has been parked in RBI.
A lower SLR increases the banks' resources to lend and helps control inflation and pushes growth.
What is Repo Rate?
The rate at which the RBI lends money to commercial banks is called repo rate. Repo rate is a one of the key instrument of monetary policy. Whenever banks have any
shortage of funds they can always borrow from the RBI at the curent repo rate. A cut in the repo rate helps banks get money at a cheaper rate and vice versa.
Higher repo rate may slowdown the growth of the economy. If the repo rate is low then banks can charge lower interest rates on the loans taken by us.
At present, the repo rate is 6%.
What is Reverse Repo Rate?
To control the money supply in the country, RBI borrows money from commercial banks at a certain rate, that rate has been defined as Reverse Repo Rate.
When banks have surplus funds but have no lending (or) investment options, they deposit such funds with RBI. Banks earn interest on such funds.
Currently, the reverse repo rate is 5.75%.
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