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RBI credit policy: What these banking terms mean

In its efforts to keep inflation under check and spur economic growth, the RBI has a quiver full of arrows that it uses to control the flow of money into the economy:
Demystifying banking jargon:
  1. Bank rate is the rate at which RBI lends to commercial banks. This influences the interest rates commercial banks charge their customers. Pegged at 9 per cent currently, a change in the bank rate has a trickle-down effect. A higher bank rate will mean commercial banks will increase lending rates, affecting your installments and the interest rates your deposits fetch.

  2. The cash reserve ratio stipulates the minimum proportion of deposits that banks must hold with the central bank. When the RBI increases the CRR, banks have fewer funds to lend or invest since they have to park more money with the central bank, helping it control liquidity in an economy. If liquidity decreases, there is less money available, and that helps bring down inflation.

  3. Statutory liquidity ratio defines the minimum proportion of their deposits that banks have to maintain at the close of business every day as liquid assets, such as cash or gold. A higher SLR restricts a bank’s ability to infuse more money into the economy, reining in inflation.

  4. Repo rate is the rate the central bank charges to lend to banks against securities. If banks have to pay more to borrow money, they may increase the rates they charge their customers or may borrow less, thus reducing inflation.

  5. Reverse repo rate is the rate at which the RBI borrows money from banks. So if the RBI hikes the reverse repo rate, banks will be happy to keep more funds with the RBI since they get a higher rate of return. Consequently, they will have less money to lend.

Story first published on: October 30, 2012 09:34 (IST)

Tags: RBI credit policy

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