Bank Interest rates are crucial for an economy and decides money supply, credit cost and inflation, One of the primary functions of RBI is to control the supply of money in the economy and also ‘the cost of credit.’ Meaning, how much money is available for the industry or the economy and what is the price that the economy has to pay to borrow that money. ‘Availability of money’ is nothing but liquidity and ‘cost of borrowing’ is interest rates.
CRR ( Cash Reserve Ratio) 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 and 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.
SLR ( Statutory Liquidity Ration) signifies the amount which forms a certain percentage of the bank 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.
Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Reserve Bank of India (RBI) to maintain liquidity, in case of shortage of funds or due to some statutory measures. It is one of the main tools of RBI to keep inflation under control.
Reverse Repo on the other hand 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 (people, companies etc) which is always risky.
Find the Economic Indicators and the interest rates on a single window in the world commodities section of Eforex India which quotes Metals, commodities, Sensex, Dollar Index, Reference Rates & economic indicators like CRR, SLR, Repo Rates and Reverse Repo Rates.