Banking Awareness about Policy Rates and Reserve Ratios
Hi IBPS Aspirants, Today we Publishing about Policy Rates and Reserve Ratios. This post contains all about Bank policy rates, reserve ratios ( Bank Rate, CRR, SLR ). And also We publishing Present Policy Rates and Reserve Ratios Table also. Happy Reading......
Bank Rate:
RBI lends (no collateral required for long term lendings) to the commercial banks through its discount window to help the banks meet depositor’s demands and reserve requirements for long term. The Interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if RBI wants to reduce the liquidity and money supply in the system, it will increase the bank rate. The Bank Rate has lost its significance as a monetary policy tool as the central bank presently signals stance through changes in repo, the rate at which banks borrow short-term funds from RBI. The Bank Rate, which is the standard rate at which the RBI buys or rediscount bills of exchange or other commercial paper, is presently used as a penal rate which the banks have to pay for their failure to meet the mandatory Cash Reserve Ratio (CRR). As of 29 jan, 2014, the bank rate was 9.00%.
Reserve requirement cash reserve ratio (CRR):
Every commercial bank has to keep certain minimum cash reserves with RBI. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for 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 5% and 20% of total of their demand and time liabilities]. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to effect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 4.00%.. -25 basis points cut in Cash Reserve Ratio(CRR) on 17 September 2012, It will release Rs 17,000 crore into the system/Market. The RBI lowered the CRR by 25 basis points to 4.25% on 30 October 2012, a move it said would inject about 175 billion rupees into the banking system in order to pre-empt potentially tightening liquidity. The latest CRR is 4%
Statutory Liquidity ratio (SLR):
Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.The latest SLR as on 8/8/14 is 22.00%. In well-developed economies, central banks use open market operations—buying and selling of eligible securities by central bank in the money market—to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years.
Click Here to Download Present Bank Ratio and Rates Pdf
Generally RBI uses three kinds of selective credit controls:
Generally RBI uses three kinds of selective credit controls:
- Minimum margins for lending against specific securities.
- Ceiling on the amounts of credit for certain purposes.
- Discriminatory rate of interest charged on certain types of advances.
Direct credit controls in India are of three types:
- Part of the interest rate structure i.e. on small savings and provident funds, are administratively set.
- Banks are mandatory required to keep 23% of their deposits in the form of government securities.
- Banks are required to lend to the priority sectors to the extent of 40% of their advances.
Important Links:
- Banking Awareness Structure of Indian Banking System
- Banking Awareness Central Bank- Reserve Bank of India
- Expected Questions from Union Budget 2014
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