Repo (Repurchase) Rate Repo rate is the rate at which banks borrow funds from the RBI to meet

the gap between the demand they are facing for money (loans) and how much they have on hand to lend. If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. Reverse Repo Rate This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or Banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk) Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected. Bank Rate This is the rate at which RBI lends money to other banks or financial institutions. The bank rate signals the central bank¶s long-term outlook on interest rates. If the bank rate moves up, longterm interest rates also tend to move up, and vice-versa. Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit. Call Rate Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis. CRR Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money

having regard to the needs of securing the monetary stability in the country. Thus. and if the cash reserve ratio is 9%. but also enables RBI to control liquidity in the system. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Banks in India are required to hold a certain proportion of their deposits in the form of cash. Consequent upon amendment to sub-Section 42(1). the Reserve Bank. the banks will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 for investments and lending / credit purpose. banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What is CRR (For Non Bankers) : CRR means Cash Reserve Ratio. which is considered as equivlanet to holding cash with themselves. Therefore. can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate. long-term interest rates also tend to move up. CRR). in all likelihood banks will hikes their own lending rates to ensure and they continue to make a profit. it can said that in case bank rate is hiked. When a bank¶s deposits increase by Rs100. actually Banks don¶t hold these as cash with themselves. in terms of Section 42(1) of the RBI Act.e. which central bank uses for short-term purposes. and vice-versa. the lower is the amount that banks . but deposit such case with Reserve Bank of India (RBI) / currency chests.e. This any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI. However. What SLR does is again restrict the bank¶s leverage in pumping more money into the economy. What is CRR? The Reserve Bank of India (Amendment) Bill. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. What is Bank rate? Bank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to commercial banks. Thus.SLR Besides the CRR. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate. If the bank rate goes up. [Before the enactment of this amendment. RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. What is Bank Rate ? (For Non Bankers) : This is the rate at which central bank (RBI) lends money to other banks or financial institutions. 2006 has been enacted and has come into force with its gazette notification. it not only ensures that a portion of bank deposits is totally risk-free. and thereby. Thus we can say that this serves duel purposes i. higher the ratio (i. the Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and 20 per cent of total of their demand and time liabilities]. Bank Rate is a tool. inflation by tying the hands of the banks in lending money..

When the repo rate increases borrowing from RBI becomes more expensive. makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. dealing in financial instruments or providing financial services. honors . similarly. it increases the repo rate. Present SLR is 24%. An increase in SLR also restrict the bank¶s leverage position to pump more money into the economy. As a result. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). it reduces the repo rate Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. Thus. savings and loan associations and credit unions.e. Therefore.f. chartered by a state or federal government. usually a corporation. cash or other approved securities. it is a tool used by RBI to control liquidity in the banking system. A bank is an organization. What is SLR? Every bank is required to maintain at the close of business every day. whereas Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks A financial institution is any organization in the business of moving. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold. credit unions or other entity that distribute cash. The RBI uses this tool when it feels there is too much money floating in the banking system. What is SLR ? (For Non Bankers) : SLR stands for Statutory Liquidity Ratio. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. Refers to any bank. RBI wants to make it more expensive for the banks to borrow money. 8/11/208. we can say that in case. from earlier 25%) RBI is empowered to increase this ratio up to 40%. (reduced w. investing or lending money. thrifts. a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash.will be able to use for lending and investment. federal and state savings banks. Includes commercial banks. What are Repo rate and Reverse Repo rate? Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. which does most or all of the following: receives demand deposits and time deposits. if it wants to make it cheaper for banks to borrow money. banks would prefer to keep their money with the RBI Thus. gold and un-encumbered approved securities. This power of RBI to reduce the lendable amount by increasing the CRR. Thus. we can conclude that Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI. we can say that it is ratio of cash and some other approved to liabilities (deposits) It regulates the credit growth in India.

instruments drawn on them. and notes. certifies depositor's checks. makes loans. and issues drafts and cashier's checks. collects checks. while an NBFI is mainly concerned with the term loan needs of large enterprises (c) A bank deals with both internal and international customers while an NBFI is mainly concerned with the finances of foreign companies (d) A bank¶s man interest is to help in business transactions and savings/ investment activities while an NBFI¶s main interest is in the stabilization of the currency . The difference between a bank and a non-banking financial institution (NBFI) is that (a) A bank interacts directly with customers while an NBFI interacts with banks and governments (b) A bank indulges in a number of activities relating to finance with a range of customers. A financial institution may be a bank or an investment company. and pays interest on them. discounts notes. drafts. and invests in securities.

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