Repo

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Querist : Anonymous

Querist : Anonymous (Querist)

20 April 2012 SIR..
WHAT IS REPO RATE & REVERSE REPO RATE.?
AND ALSO TELL ME ABOUT CASH RESERVE RATIO(CRR)

Ajay Mishra

Ajay Mishra (Expert)
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20 April 2012 Hi

Repo (Repurchase) Rate

Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.

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

Reverse Repo Rate

This is the exact opposite of repo rate.

The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system

If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk)

Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy

Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.

Bank Rate

This is the rate at which RBI lends money to other banks (or financial institutions .

The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.

Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.

Call Rate

Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Si nce banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis.

CRR

Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money

SLR

Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the bank’s leverage in pumping more money into the economy.

Regards

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CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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20 April 2012 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.

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.

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CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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20 April 2012 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.

For more on CRR and also SLR check the file from RBI site. Link given below-

http://rbidocs.rbi.org.in/rdocs/notification/PDFs/55663.pdf

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Querist : Anonymous

Querist : Anonymous (Querist)

20 April 2012 THANK YOU BOTH ABOVE SIR...

CA Kishore Tallam

CA Kishore Tallam (Expert)
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20 April 2012 Repo rate is the rate of interest charged by RBI in lending amounts to Banks and reverse repo is reverse way.
If the repo decreases, then banks can borrow funds at lesser interest and also can lend at lesser interest thereby customers can also get interest at lower rates.
CRR means Cash Reserve Ratio. Every Schedule bank has to keep 4.75% of its time and demand liabilities in India with RBI.
SLR means statutory liquidity ratio. Every scheduled bank has to maintain 24% of its time and demand liabilties in instruments specified by RBI.

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