Economy

Banking
Terminology

Detailed explanation
 It is a certain minimum amount of deposit that banks
have to hold as reserves with central bank .i.e. RBI.
It is either stored in bank’s vault or is sent to RBI .
Cash Banks do not get any interest on money that is with
RBI under CRR requirements.
Reserve
Purpose :- It ensure security of the amount. It makes it
Ratio readily available when customer want their deposits
back.
 Also , CRR helps in keeping INFLATION under
control.
  It is minimum percentage of deposit that a
commercial bank has to maintain in the form of
liquid cash, gold, or other approved securities.
 It is basically the reserve requirement that bank
must keep before providing credit to customers.
 RBI always determines the % of SLR .
Statutory  SLR is prescribed by section 24(2A) of Banking
Regulation Act of 1949.
liquidators  SLR is determined as % of TOTAL DEMAND &
ratio TIME LIABILITIES , Here Time liabilities refer to
liabilities that commercial banks are liable to repay
to customers after an agreed period.
 Demand liabilities are customer deposits which are
repayable on demand.
 It is usually used to control inflation and fuel growth
.
  Repo rate is the rate at which the Central Bank
lends money to commercial banks.

Repo  Repo Rate full form is Repurchase Agreement.

 Bank obtain loan from the RBI by selling
Rate qualifying securities.
 Central Bank and commercial Bank would reach
an agreement to repurchase the securities at set
price
  Reverse Repo Rate is rate of Interest that is provided by
Reserve Bank of India while borrowing money from the
commercial Bank.
 Repo Rate and Reverse Repo Rate were defined In RBI Act
in 2006 to give them Statutory status.

Reverse  Federal Reserve starting using a type of Repo in 1920s.

 Introduction of Liquidity Adjustment Facility in India was
Repo Rate on the basis of the recommendation of Narsimham
Committee on Banking Sector Reforms.
 In April 1999, an interim LAF was introduced to provide a
ceiling and fixed rate repo were continued to provide a floor
for money market rates.
  Liquidity refers to availability of cash or other highly
liquid asset that can be easily converted into cash to
Role of Repo meet short term funding needs
and Reverse  When Repo Rate Increases -> Liquidity Decrease
Repo Rate in  When Repo Rate Decrease -> Liquidity Increase
maintaining  When Reverse Repo Rate Increase -> Liquidity
Decrease
Liquidity  When Reverse Repo Rate Decrease -> Liquidity
Increase