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CRR(Cash Reserve Ratio):Cash reserve Ratio (CRR) is the amount of Cash(liquid cash like gold) that the banks have to keep with RBI. This Ratio is basically to secure solvency of the bank and to drain out the excessive money from the banks. If RBI decides to increase the percent of this, the available amount with the banks comes down and if RBI reduce the CRR then available amount with Banks increased and they are able to lend more.Present rate is (5.75% today 29.01.10) announced Repo Rate:Repo rate is the rate at which our banks borrow rupees from RBI. This facility is for short term measure and to fill gaps between demand and supply of money in a bank .when a bank is short of funds they they borrow from bank at repo rate and if bank has a surplus fund then the deposit the funds with RBI and earn at Reverse repo rate .present rate is 4.75 as on 29.01.2010) Reverse Repo rate is the rate which is paid by RBI to banks on Deposit of funds with RBI.A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.To borrow from RBi bank have to submit liquid bonds /Govt Bonds as collateral security ,so this facility is a short term gap filling facility and bank does not use this facility to Lend more to their customers. present rate is 3.25 as on 29.01.2010) SLR((Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit.Generally this mandatory ration is complied by investing in Govt bonds.present rate of SLR is 25 %.(as on 29.01.2010)But Banks average is 27.5 % ,the reason behind it is that in deficit Budgeting ,Govt landing is more so they borrow money from banks by selling their bonds to banks.so banks have invested more than required percentage and use these excess bonds as collateral security ( over and above SLR )to avail short term Funds from the RBI at Repo rate.
Impact on Inflation and Interest rates: As we all have read the famous line "if all thing remain the same ......".so In all my below paragraphs please note that there are many assumption in fixing the relation between this ratio and interest rates . SLR and Cash reserve ratio is maintained for bank solvency and Higher ratio of SLR and CRR makes bank relatively safe as higher ratio means they have more of their funds deposited in liquid securities and can fulfill the demand on redemption of deposit from the Bank.lets take an example :suppose a Bank has taken a deposit of 100 from public and CRR is 9 and SLR is 25 then available funds to lend from deposits with the bank will be 100-9-25=66 so their is direct relation between CRR ,SLR and Funds available with bank to lend to public out of deposit received from public .
Impact on Interest rates of this ratios: Now take point what will be the impact on Interest rates of this ratios:Interest rate are fixed on the Demand supply situation of the amount available with person who want to lend and and person who want to borrow and interest rate is fixed on demand supply of the funds if demand is more and supply is less then interest rate rises up and if demand is less and supply is excessive then interest rate comes down .this relation is based on many assumption as said above. So RBI is controlling the supply side of the Funds and by changes in CRR and SLR, Bank control the supply side of the money.so when RBI increase these ratio then available funds with the banks will go down and as demand remain the same then people will have to pay more as interest and interest rate will go up.On the reverse if RBI reduce these rates ,then amount available with bank for lending will be increased and they have to reduce rates to lend more.In these situation bank also reduce the rate of short term deposit from public as they have surplus money already to lend.so these rates have double impact the first direct effect is ,bank reduce rate of lending so more money is available with people and second is interest on Deposit will be reduced so more money will be available with the people. But other side of interest rate i.e demand/off take of loan is also important to set the interest rate .This may be some time region wise and seasonal or other factor also effect the decision of Interest rate . Impact on inflation As from the above para we have understood that how these ratio reduce or increase the money supply in the system and we know if
more person is demanding few goods then price of goods tends to increase and its called inflation so when RBI reduce these ratios then money supply in market increases and inflation is rises further but in present case this is not the correct and right relation.The Increase in CRR will squeeze 36000 crore from market ,so less money will chase few things means less demand so it will reduce Inflation. At the time of depression the reduction of these ratio is to maintain liquidity without disturbing inflation much.while marked is falling and each and every commodity rate going downwards.In these situation after increasing of money supply inflation rate does not goes up as the demand is slow and reduction in commodity prices will nullify the impact of increase in money supply and have less inflationary effects. But some times in few cases Inflation is due to supply side ,like in case of pulses and sugar the demand is some what the same but production has been reduced and rate has been doubled .In these types of cases Ever Increase in CRR will not have much impact as the problem is from supply side .
Impact of crises on exchange rate: please note that this explanation is based on many assumptions, Dollar rate is fixed by demand and supply position of dollar so if there is less supply and more demand of dollar then dollar-rupee exchange rate will go up means dollar value will increase.In present senerio dollar has risen up not the rupee has gone down means the issue is related to more to dollar and less to rupee.more over dollar exchange rates has risen up with all major currencies of the world so as ruppe. Dollar($) v/s rupee Dollar Main Inflow:(supply) 1. 2. 3. 4. through export through FII investment in share and Dept market repatriation fund sent back to India by NRI Capital receipt Loan.
As the Financial position of FII in their country is not good so they are not investing or waiting and in their own states they need funds or the rates of stock s in their home countries are also attractive so inflow to India has been reduced ,and net balance has gone negative as they are investing less than selling of their investments to save their parent companies in the home countries . Due to financial crunch demand in USA has reduced so less dollar inflow against Export. Repatriation by NRI has increased as exchange rate is favorable and now they can send more rupee to their relative with same dollar outflow so they are en cashing it.But their capacity to send more dollar has also been affected due to less income in USA. Capital receipt has also reduced as the financial company are not willing to lend funds. Dollar main Out flow(demand) 1. paid for Import
2. withdrawal of funds by FII 3. Capital loan repayment effects of point 2 has increase the demand of dollar so from the above dollar demand /supply situation the exchange rates has been increased so fast.
Measure which may be taken in this Crises:(this is based on measures taken by other countries ) 1. Share market:Govt should create a Fund which may be called as Market stabilization fund ,which should me managed by professional agency and should buy good reputed stock from the Market when share are available at throw away prices and sell them when they seems to be overvalued.and the purpose of the fund should be stabilization of the market and welfare of the Investor and not to earn a profit from the market and buying and selling should be on the basis of Long term period.By doing this sentiment will improve ,volatility will be reduced and selling from large FII can be absorbed and in my point of view there is no chance of loss in these venture.To start with 5000-10000 cr fund is enough.Russian govt has adopted this system. Buying of stocks of private sector Banks:if govt By symbolically purchase shares of some major private banks then it will improve the sentiment and increase the confidence of public in private sector bank .This measures Indicate that banks are sound and govt is also investing in them .More over money received from selling of shares also improve the liquidity position of the banks To control prices of Sugar,pluses and other eatable ,Govt must have strict policy against all stockist and speculator and should import material from outside as one time relief and should prepare a suitable plan to increase supplies of such things buy giving incentives to farmers and proper rate of their produce and should reduce middlemen out of the system . More you can add..............
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.Bank Rate is a tool, which central bank uses for short-term purposes. 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. 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. What is Bank Rate ? (For Non Bankers) : This is the rate at which central bank (RBI) lends
money to other banks or financial institutions. If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it can said that in case bank rate is hiked, in all likelihood banks will hikes their own lending rates to ensure and they continue to make a profit.
The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and has come into force with its gazette notification. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, can prescribe Cash Reserve Ratio (CRR) for
What is CRR?
scheduled banks without any floor rate or ceiling rate. [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, 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].
RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures that a portion
of bank deposits is totally risk-free, but also enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money.
What is CRR (For Non Bankers) : CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivlanet to holding cash with themselves.. 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. Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 9%, 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. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment. This power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system. What is SLR? Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 24%. (reduced w.e.f. 8/11/208, from earlier 25%) RBI is empowered to increase this ratio up to 40%. An increase in
SLR also restrict the bank’s leverage position to pump more money into the economy.
What is SLR ? (For Non Bankers) : SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits) It regulates the credit growth in India. 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. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, 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 is the rate at which banks park their short-term excess liquidity with the
RBI. The RBI 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 RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI
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