Different types of Bank rates used in India

The supply of money in the economic system of any country is determined by the Monetary Policy formulated by the central bank of the country. The monetary policies control the interest rates in order to maintain price stability in the economy.

In India, Reserve Bank of India (RBI) holds the right to control the price stability. Furthermore, there are many other goals of the monetary policy of India which are directed and driven by the RBI. Also, the monetary policy governs the various types of rates existing in the banking sector which are flexible as per the economic scenario of the country and are decided by the RBI from time to time.

Some important rates in the Indian banking system are:-

 

Repo Rate– Repo rate is the rate at which banks borrow money from the RBI to meet their deficiencies. When the banks fall short of funds, the RBI lends money to the commercial banks at a certain interest rate which is called as repo rate. The banks mortgage their government bonds as collateral security to borrow from Reserve Bank of India. Repo rate is used as a tool by monetary authorities to control inflation. When inflation strikes, RBI increases repo rate as this acts as a hindrance for banks to borrow. This ultimately reduces the money supply in the economy and thus helps in controlling inflation. If the Reserve Bank wants to make it more expensive for the banks to borrow money, it increases the repo rate. Likewise, if it wants banks to borrow more money, it reduces the repo rate.

Reverse Repo Rate– On the contrary, reverse repo rate is the interest rate at which the RBI borrows money from the commercial banks. The RBI uses this tool when there are more than enough money floating in the banking system.

High reverse repo rate encourages the banks to give the money back to RBI and gross interest on it. This happens when banks don’t have enough lenders to lend the money to and money is lying dead with the banks. When the reverse repo rate is increased, the banks prefer to lend their money to RBI which in return pays them a substantial rate of interest. Hence, banks prefer to keep their money with the RBI instead of keeping it at stake anywhere else.
Current Reverse Repo Rate-6%

Bank Rate-The rate of interest charged by the central bank on the loans they have extended to commercial banks and other financial institutions is called “Bank Rate”. In this case, there is no repurchasing agreement signed, no securities sold or collateral involved. Banks borrow funds from the central bank and lend the money to their customers at a higher interest rate, thus, making profits. Bank Rate is usually higher than Repo Rate as it is an important tool to control liquidity. Lower bank rates can help to expand the economy by lowering the cost of funds for borrowers. When Bank Rate is increased by RBI, the borrowing costs of the banks’ increase which, in return, reduce the supply of money in the market.

Call Rate– Call rate is also known as the interest rate which is paid by the banks for lending and borrowing for daily fund requirement. The call rate is the interest rate on a type of short-term loan that banks give to brokers who in turn lend the money to investors to fund margin accounts. For both brokers and investors, this type of loan does not have a set repayment schedule and must be repaid on demand.

 

Cash Reserve Ratio– Cash reserve ratio (CRR) is generally defined as a particular minimum amount of deposits that needs to be maintained as a reserve by every commercial bank in India according to the requirement of the RBI. The CRR will be fixed as per the rules and regulations of the RBI. It is usually considered that such a part of bank deposits is totally risk-free. It is actually a certain percentage of bank deposits which banks are bound to keep with RBI in the form of reserves. It supports the RBI in controlling the liquidity in the banking system. Besides, it helps to curb the inflation as well.

Current Cash Reserve Ratio-4%

Statutory Liquidity Ratio (SLR)- Statutory Liquidity Ratio refers to the proportion of deposits the commercial bank is required to maintain with them in the form of liquid assets in addition to the cash reserve ratio. As per the RBI, the Banks have to maintain the ratio of the liquid assets to time and demand liabilities in the form of liquid assets like cash, precious metals, government bonds or government approved securities.

The statutory liquidity ratio is determined by the central bank as the percentage of total demand and time liabilities.

The objective of statutory liquidity ratio is to prevent the commercial banks from liquidating their liquid assets during the time when CRR is raised.

A penalty at a rate of 3% per annum above the bank rate is imposed if any commercial bank fails to maintain the statutory liquidity ratio.

Current Statutory Liquidity Ratio-19.5%

 

Marginal Standing Facility (MSF)- Marginal Standing Facility is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12) and refers to the reformatory rate at which banks can borrow money from the central bank over and above what is available to them.