Key Rates used by RBI
The Bank has various Key Rates at its disposal to influence the money supply in the market through its monetary policy.
What is Liquidity Adjustment Facility?
Liquidity Adjustment Facility (LAF) helps banks adjust their daily liquidity mismatches by pledging government securities over and above the SLR requirement. Repo Rates and Reverse Repo Rates form a part of the Liquidity Adjustment Facility.
What is RBI Repo Rate?
- RBI Repo Rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. By controlling the Repo Rate, and the lending rates to commercial banks, the RBI also indirectly affects the lending rates granted by commercial banks to end consumers.
- When there is low inflation along with low-capacity utilisation and the market demands more supply of money, the RBI decreases the RBI Repo Rate. By decreasing the Repo Rate, the RBI encourages commercial banks to borrow more money from it.
- Increasing RBI Repo Rate means that commercial banks don’t borrow money liberally from the RBI, and avoid doing so. This slows down the economic progress, reduces the liquidity in the market, and the reduction in money supply reduces the inflation. This is an important measure in curbing inflation.
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What is RBI Reverse Repo Rate?
- Reverse Repo Rate is the rate at which the Reserve Bank of India borrows money from commercial banks within the country. It is one of the monetary policy instrument which can be used to control the money supply in the country.
- Other things remaining constant, an increase in the reverse repo rate will result in decrease in the money supply and vice-versa.
- An increase in reverse repo rate implies a situation where commercial banks get more incentives if they park their funds with the RBI, thereby decreasing the supply of money in the market.
What is Marginal Standing Facility (MSF) Rate?
- Another one of the Key Rates used by RBI is the Marginal Standing Facility Rate.
- Marginal Standing Facility is a new window of Liquidity Adjustment Facility (LAF) created by Reserve Bank of India
- It was created in RBI’s credit policy of May 2011.
- At this rate, the banks are able to borrow overnight funds from RBI against the approved government securities.
- Marginal standing facility (MSF) acts as a support plan for banks, letting them borrow funds from the Reserve Bank of India in an emergency situation wherein the inter-bank liquidity dries up completely.
- Banks borrow from RBI by pledging government securities at a rate comparatively higher than the Repo Rate under liquidity adjustment facility (LAF).
- Under MSF, banks can borrow funds approximately around one percentage of their net demand and time liabilities (NDTL).
What is Bank Rate?
- Bank rate is the rate of interest at which a central bank charges its loans and advances to a commercial bank.
- In case of shortage of funds, banks can borrow from the central bank based on the monetary policy of the country.
- The borrowing is commonly done via repo rate, it is more applicable when there is a liquidity crunch situation in the market.
- The Reserve Bank of India determines the bank rate at which it provides loans to commercial banks with no collateral. This rate is revised periodically, reactively depending on the economy.
What is Cash Reserve Ratio (CRR)?
- CRR is the basic percentage of a bank’s net demand and time liabilities (deposits) that banks ought to maintain as cash balance with the RBI.
- A high CRR percentage means banks have less funds to lend, a low CRR does the opposite.
- This in turn impacts liquidity in the economy.
- CRR is used by RBI to tighten or ease liquidity by increasing or decreasing it as per the situation demands.
What is Statutory Liquidity Ratio (SLR)?
- Statutory Liquidity Ratio is the percentage of net demand and time liabilities (deposits) that banks ought to maintain in safe and liquid assets approved by the RBI.
- The assets can be in the form of government securities, cash and gold.
- Any fluctuations in SLR often tend to influence the availability of resources in the banking system for lending to the private sector.
Important Key Rates used by RBI Updated as of June 2019
You can visit the RBI Official Site
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