Different Bank Rates and Their Application

8/13/2019 Different Bank Rates and Their Application

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Different Bank Rates and Their Application


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What is Money Supply?

Money supply is one of the important indicator of

macroeconomic environment

This refers to the total volume of money circulating in the

economy at a point in time.


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Monetary Policy

It is the process by which the central bank or monetaryauthority of a country regulates (i) the supply of money (ii)

availability of money and (iii) cost of money or rate of

interest in order to attain a set of objectives oriented

towards the growth and stability of the economy


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Types Of Monetary Policy

I. Cheap money policy : Followed in periods of slums & depression

II. Dear money policy: Followed in periods of boom & inflation.


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Monetary Policy Instruments

I. Open Market Operations

II. Bank rate

III. Cash Reserve Ratio

IV. Statutory Liquidity Ratio

V. Repo rate

VI. Reverse Repo rate


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I. Open Market Operations

OMOs are the means of implementing monetary policy bywhich a central bank controls the nationsmoney supply by

buying and selling government securities, or other financial

instruments


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What is the outcome on account of OMO?

When the RBI buys bonds from the market and infuses liquidity, the

consequences are:

It tends to soften the interest rates

It enables corporate to borrow at favorable interest rates

It may tend to increase inflation


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Bank rate

Rate at which Central Bank lends money to commercialBanks

The bank rate signals the central bank's long-term outlook

on interest rates. If the bank rate moves up, long-terminterest rates also tend to move up, and vice-versa.

Any increase in Bank rate results in an increase in interestrate charged by Commercial banks which in turn leads to

low level of investment and low inflation


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Cash Reserve Ratio

It refers to the cash which banks have to maintain with RBI

as certain percentage of their demand and time liabilities

An increase in CRR reduces the cash with commercial

banks which results in low supply of currency in the

market, higher interest rate and low inflation


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Statutory Liquidity Ratio

It is the percentage of total deposits commercial bankshave to invest in government bonds and other approvedsecurities. RBI in November cut the SLR for banks by onepercentage point and it now stands at 24% of their totaldemand and time deposit liabilities

Objectives of SLRTo restrict expansion of Bank credit

To augment banks investment in government securities

To ensure solvency of banks


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Meaning of Repo

The term Repo is used as an abbreviation for Repurchase Agreement.

Repo rate is the interest rate at which the central bank lends funds tobanks against pledging securities

It enables collateralized short term borrowing and lending throughsale/purchase operations in debt instruments


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Present Repo Rate

If the RBI wants to make it more expensive for the banks to borrow money, itincreases the repo rate; similarly, if it wants to make it cheaper for banks

to borrow money, it reduces the repo rate.


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Reverse Repo

The rate at which RBI borrows money from the banks (or

banks lend money to the RBI) is termed the reverse repo

rate.


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Documents

Different Bank Rates and Their Application