What is CRR, SLR, Repo Rate & Reverse Repo Rate?

‘CRR,’ ‘SLR,’ ‘Repo Rate,’ ‘Reverse Repo Rate’ are the instruments used in monetary policy so that economic stability is maintained. RBI (Reserve Bank Of India) increases or decreases these factors such that inflation or depression is controlled.

These factors are the major reason behind the changes in the interest rates on deposits and home loans. Having a thorough knowledge can help you get a home loan or a fixed deposit at the best interest rates.

Primary Function Of RBI

1. RBI controls the amount of money available in the market. RBI improvises this by increasing or decreasing the amount of money available in the economy
2. The economy has to pay the price to borrow that money, which is said as ‘The cost of credit.’

Why Do RBI Change Interest Rates?

RBI functions to maintain monetary stability throughout the nation. So how do they do it? RBI maintains monetary stability by using a policy known as Monetary Policy, through which it controls the money supply in the economy and cost of credit

And there are two main factors affected by it, growth and inflation.

Cash Reserve Rate(CRR)

Banks in India have to maintain a fixed number of funds with the Reserve Bank of India (RBI) at all times this is said as Cash Reserve Ratio (CRR).

The banks have to confine a certain portion of their deposits with RBI in the form of cash.

If the central bank decides to increase the CRR, the banks’ amount for distribution comes down. CRR is an instrument used by RBI to eliminate excessive money.

RBI requires all the banks to maintain an average cash balance with it. This balance to be maintained is quite greater than almost 3 % of NTDL.

Why is CRR kept with RBI?

i. Banks have a daily addition of new deposits and already present old deposits, So banks have to maintain a minimum percentage of these deposits with RBI.

Additionally, these have to be maintained with the RBI daily.

ii. When there is lower liquidity, which means that the interest rate is high, RBI reviews it and changes it whenever it feels the need to do so

RBI can impose penalties in case the banks fail to maintain the minimum CRR

Objectives 

1. Base Rate is fixed by taking CRR as a reference rate.

As the Base Rate is lowered, banks report a lower cost of giving loans, and hence people can get affordable loans.

2. Cash Reserve Ratio assures banks that a portion of the bank’s deposit is completely secure with the central bank.

3. CRR also helps to keep the swelling or rising prices in the market under control. When there is swelling in the economy, RBI increases the CRR so that bank has less money and cannot distribute loans.

Advantages

1. It ensures that the liquidity system is consistent and maintained well in all banks.

2. RBI also coordinates and controls the funds maintained by banks in the form of CRR rate, which helps to have a smooth and continuous supply of cash and credit in the economy.

3. RBI reduces CRR so that banks can offer more loans at a comparatively less interest to creditors, which increases the flow of cash in the economy.

4. When market interest rates go down severely, CRR improves the depression period by absorbing the liquidity.

5. Unlike Market Stabilization Scheme bonds(MSS) and other monetary instruments, the Cash Reserve Ratio implementation is more effective and easier.

6. CRR also helps in easing the financial environment when there is surplus money in the market

Importance

Cash Reserve Ratio is important for the banks as well as customers.

In the case of depositors, If the bank sincerely maintains the CRR, then the depositors don’t need to worry about their money as their money is completely secured in the form of reserve maintained with RBI.

Banks like to lend a maximum amount of funds to borrowers and retain very little money themselves for other days to day purposes.

When banks lend more, they gain a higher amount of profits. Therefore, banks, as well as depositors, like it when the CRR rate is low.

Though banks use a large part of the money for lending purposes, Banks also have to keep apart if there are sudden large withdrawals.

Effects 

There is always a requirement of money, so CRR ensures that the last amount of money is always available to carry out daily activities. The second effect of CRR is that the RBI controls the CRR rate and maintains the cash availability in the economy.

Banks do not earn any interest in the funds they keep with the bank, which means that they keep the money for free, so commercial banks prefer CRR to below preferred.

When RBI increases the CRR rate, which means that banks can give fewer loans, in return, To discourage the customers from taking more loans, banks can indefinitely increase the interest rates due to which there will be an increase in loan expense. If a depositor has even invested in banks’ stocks, then an increase in CRR rate indicates that their bank will have comparatively lower margins.

When the rate of CRR is low, banks get to invest more, reducing the interest rates on loans. Also, a low cash reserve ratio means that the banking system’s money supply will increase; increased money supply means high inflation; hence, RBI has to lower the CRR rate to reduce inflation.

What Is NDTL?

NTDL is the addition of the deposits made and the demand for funds in all commercial banks, where assets are subtracted to get the net liability of other banks

In banks, deposits made by us are counted as a liability, consisting of demand and time deposits of public and other banks.

Statutory Liability Ratio (SLR)

Banks have to maintain an SLR rate besides CRR; the nation’s financial entities have to maintain a percentage of their new and old deposits in financial securities like gold, bonds, etc. approved by India’s government.

Unlike CRR, the banks earn a certain ‘interest’ for the investment done by them. The banks mostly invest in government-approved securities such as Gold, Cash, Bonds, etc. This is done so that the bank has sufficient funds available to pay back its customers who may want to withdraw in an emergency.

The higher the SLR, the Lower is the banks’ capacity to lend, which helps reduce inflation by soaking the liquidity from the market and vice versa.MAs the bank will have less money, they will charge more interest to keep their profit margin, and hence the number of loans given will decrease. This helps RBI to keep control of Inflation and Depression.

Value And Formula 

The percentage of SLR that has to be deposited is some percentage of total demands and total deposits of a bank.

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

The Reserve Bank of India has fixed this percentage. The SLR rate can be changed by RBI, which stands at 18.25% right now.

Objectives 

i. To Curtail The Banks From Over Liquidating

In the absence of SLR, when the CRR goes up, a bank institution can experience over liquidation, and the bank requires funds. RBI avails SLR so that it can have control over the bank credit and its liquidity.

SLR ensures that the commercial banks have enough funds and assures that banks have a percentage of their deposits and demands invested in government securities.

ii. To Increase Or Decrease The Flow Of Bank Credit

There are two phases in the economy, Inflation, and recession. Inflation is an excess of money; to control it, RBI increases the SLR rate and decreases in case of Recession

Impact Of SLR On The Investor

When RBI has to determine the base rate, then the Statutory Liquidity Ratio (SLR) acts as a reference rate. Banks are not allowed to lend funds below the Base rate. A decrease in the Base rate implies that bank can lower their interest rates and extend affordable loans

When RBI imposes SLR to ensure that a certain amount of the deposits are secure and customers can withdraw them anytime. However, due to this condition, the banks have a restrictive lending capacity. In turn, the bank has to increase its interest rates to keep the demand in control.

What Will Happen If SLR Is Not Maintained?

In India, every bank is required to maintain the SLR as per the RBI guidelines. Banks have to report their latest net demand and time liabilities to RBI every 15 days (mostly Friday) for the computation of SLR

If any bank fails to maintain the SLR, RBI will charge a 3% penalty per annum above its SLR rate. Not maintaining SLR in the next working year, too, will lead to a 5% penalty. This will also make sure that the banks have cash ready whenever customers demand them.

Note:- every bank includes:-scheduled commercial bank, central cooperative bank, state cooperative banks, and primary co-operative banks

Difference Between CRR(Cash Reserve Ratio) And SLR(Statutory Liquidity Ratio)

Repo Rate

The cost of Credit is the amount of interest at which we lend money from banks. Similarly, when banks need loans, they approach RBI, So the rate at which RBI lends money to banks is called Repo Rate. Repo rate is when the banks borrow money from RBI by selling its approved securities to RBI.For example, If a bank borrows 10,000Rs from RBI and the repo rate is 6.25%, it has to pay 625 Rs to RBI.

Higher Repo-Rate increases the cost of short-term memory and may slow down the country’s economic growth. Banks can charge lower rates of interest on the borrower’s loans when the repo rate is low. But this does not happen every time; banks need to lower their base rate to get a lower interest rate on our loans.

When Is It Reduced?

• When the central bank lowers interest rates in the market to maintain stability in the market
• When RBI is majorly confident that inflation and depression are in complete control and a price increase due to excessive demand is uncertain
• When the economy is slowing down for a long time, and the RBI wants to accelerate growth.
• When the bank is confident that the external balance of payments situation of the country is stable

When Is It Increased?

• When the RBI wants to signal higher interest rates in the market
• When RBI sees overheating in the economy and perceives a risk that inflation may start
• When there may be a risk of asset bubbles being created due to excessive capital available
• When the central bank(RBI) wants to reduce speculation in foreign exchange or sees a risk of a disorderly depreciation of Indian currency

Impact Of Repo Rate Hike

i. As the new MCLR(Marginal cost of fund-based lending) is linked to Repo Rate, any increase in repo rate will increase MCLR.

As the MCLR increases, there will be an indefinitely increase in the interest rates of multiple loans.

ii. When the Repo Rate increases, the loans or credit facilities will have lower demand due to a higher interest rate. This helps RBI and the government to control inflation.

iii. Corporate will be able to get cheaper funds for business expansion, which will help achieve the growth target.

Reverse Repo Rate

As the name suggests, the Reverse repo rate is the rate of interest given by the RBI to the commercial banks when they deposit their surplus funds for the short term.

When the banks have surplus funds with no lending or investment options, they invest their money in RBI, which earns them some interest.

Reverse repo rate policy is used by the banks when there is surplus money in the economy.

Some Effects Due To It

• Investment decreases, and thus, the growth rate becomes slowing down.
• Demand pushed inflation can be seen in the market.
• A decrement in the No. of lending loans by banks.
• The rate of people saving also increases.

How RBI’s Decision Affects Our Loans?

a. When RBI cuts repo rate, a bank may decrease their base rate and hence, in turn, would decrease interest rate percentage.

b. If there is a decrease in interest rate, the loan tenure is decreased by default by the bank.

But the same is not true for EMI; EMI remains the same.

c. Loan at a fixed rate means the rate cut in repo rate will not affect your interest rate.

Difference Between Repo Rate And Reverse Repo Rate

Current Rates Of CRR, SLR, Repo Rate, Reverse Repo Rates

What Is MSF Rate?

MSF rate or Marginal standing facility rate is an emergency scheme for banks to take a loan from the RBI when inter-bank liquidity is exhausted completely.

This facility is used by banks in an emergency to borrow money with a higher interest rate than the repo rate.

When banks are completely dried-up of all borrowing assistance, it is the penalty rate at which banks can borrow money from RBI.

What Is Basis Point?

We often hear increasing and decreasing basis points, but we do not know the actual meaning.

Basis Points depict the change in any rate or value of the financial instrument. 1 basis point is equivalent to 0.1%, so a reduction of 25 basis points means that the value of the object has decreased by 0.25%

What Is Base Rate?

Bank charges an interest rate to its customers when they provide loans, So the bank’s lowest interest rate is said as Base Rate. The bank management has the right to change it.

The RBI has no power to control it directly, but it can change the  Repo Rate, CRR, SLR, and other instruments. Reducing these interest rates makes it affordable for banks to lend loans, decreasing the base rate.

For example, When the RBI lowers the repo rate, banks may decrease the base rate. This may, in turn, profit the customers.

Often many banks take a long time to pass on the benefits to the users. And the base rate is not always the interest rate.

Monetary Policy Of RBI

RBI (Reserve Bank of India) made India’s policy known as Monetary Policy, which is related to the country’s money matters.

Measures are taken under Monetary policy to manage the supply of money, availability, and credit cost in the economy.

What Are the Main Objectives Of RBI?

1. The Monetary policy’s main motive is economic growth and stability of price and exchange rate stability.

2. It tries to promote saving and investment by decreasing the interest rates by some other measures to maintain a healthy cash flow.

3. By helping industries get a loan at a reduced rate of interest, there are more exports, improving the balance of payments.

4. The two main stages in business are boom and depression.

Inflation is controlled by reducing the supply of money in the market.

However, when the money supply increases, the demand for the loans increases; hence, the economy will also witness a rise. The monetary policy keeps the business stable by increasing or decreasing the supply of money.

5. When RBI reduces interest rates and the credit is expanded and encourages more people to secure loans helping people build their business leads to the rise in demand for goods and services.

Oppositely when the authorities wish to reduce demand so that the business is stable, they can reduce credit and raise interest rates. So this is how Monetary Policy regulates aggregate demand.

6. As the monetary policy can reduce the interest rate, micro, small, and medium enterprises (SMEs) can easily secure loans for business expansion and employment.

7. The monetary policy also allows concessional funding for the development of infrastructure in the country.

8. Additional funds are allocated at lower interest rates under the monetary policy to develop the priority sectors such as small-scale and medium-scale industries, agriculture, underdeveloped sections of the society, etc.

9. The Reserve Bank of India completely manages the banking industry (RBI).

For agricultural development, RBI directs other banks to establish rural branches wherever necessary.

FAQs

Conclusion

In the article, we have briefly described CRR, SLR, Repo Rate, Reverse Repo rate, and many other RBIs monetary policy factors. When looking for a home loan at least interest rates, then checking these factors will help you a lot.