Bank Rates

Bank Rate
Bank rate is the rate at which RBI lends to the commercial banks and other financial intermediaries. Bank rates imply a long term outlook on the interest rates and are an outcome of a long term monetary policy. It is the bank rate based on which the commercial banks decide the lending rates to the customers. Hence, any change in the bank rates have direct bearing on the lending rates to the customers.

This does not require Security Deposit.

Repo Rate (RR)

The rate at which Reserve Bank lends money to Banks. Bank borrows money from Banks by submitting securities. submitting securities is a requisite for Repurchase Transaction (Repo transaction).

Reverse Repo Rate (RRR)

The rate at which Reserve Bank borrows money from Banks.

Usually Both the rates are increased or decreased by same basis points. 

When Repo rate is increased, borrowing money from RBI gets costlier for Banks and hence Banks increases lending interest rate. This decreases loan request by customer and hence decreases liquidity in market. Same gets reversed when Repo Rate decreases. In case of decrease in RR, liquidity increases in market.

When Reverse Repo Rate is increased, depositing money in RBI becomes gives better return and hence Banks start giving better return to customer on deposit i.e., increase interest rate on deposit. This also sucks money from market and hence decreases liquidity in market.

Cash Reserve Ratio (CRR)

The percentage of Bank's net demand and time deposite which it must keep with RBI.

Statutory Liquidity Ratio (SLR)

This is the amount of liquid assets such as precious metals or other approved securities, that a financial institution must maintain with themselves as reserves other than the cash with the Central Bank.

Difference between SLR and CRR

Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of banks that they can pump in economy.

SLR restricts the bank’s leverage in pumping more money into the economy. On the other hand, CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the Central Bank to reduce liquidity in economy. Thus CRR controls liquidity in economy while SLR regulates credit growth in the country.

The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with central bank, whereas SLR is money deposited in govt. securities.

Marginal Standing Facility Rate (MSF Rate)

Under this scheme, Banks will be able to borrow upto 1% of their respective Net Demand and Time Liabilities.  The rate of interest on the amount accessed from this facility will be 100 basis points (i.e. 1%)  above the repo rate. This scheme is likely to reduce volatility in the overnight rates and improve monetary transmission.

Banks can borrow from the Reserve Bank of India under LAF - Repo Rate, which stands at 7.25%, by pleading government securities over and above the statutory liquidity requirement of 24%. Though in case of borrowing from the marginal standing facility, banks can borrow funds up to 1% of their net demand and time liabilities, at 8.25%. However, it can be within the statutory liquidity ratio of 24%.