Today was RBI policy meet and a Hike of 25 bps in repo and reverse Repo Rate.I have complied the following to give my readers who have no idea about these rates and there impacts.
What is CRR?
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with
the RBI. If the central bank decides to increase the CRR, the available amount
with the banks comes down. The RBI uses the CRR to drain out excessive money
from the system.
Commercial banks are required to maintain with the RBI an average cash balance,
the amount of which shall not be less than 3% of the total of the Net Demand and
Time Liabilities (NDTL), on a fortnightly basis and the RBI is empowered to
increase the rate of CRR to such higher rate not exceeding 20% of the NDTL.
What is Reverse Repo rate?
Reverse Repo rate is the rate at which the RBI borrows money from commercial
banks. Banks are always happy to lend money to the RBI since their money are in
safe hands with a good interest.
An increase in reverse repo rate can prompt banks to park more funds with the
RBI to earn higher returns on idle cash. It is also a tool which can be used by
the RBI to drain excess money out of the banking system.
What is a Repo Rate?
The rate at which the RBI lends money to commercial banks is called repo rate.
It is an instrument of monetary policy. Whenever banks have any shortage of
funds they can borrow from the RBI.
A reduction in the repo rate helps banks get money at a cheaper rate and vice
versa. The repo rate in India is similar to the discount rate in the US.