POLICY RATES AND RESERVE RATIOS MAY 2012

Policy rates and reserve ratios Policy rates, Reserve ratios, lending, and deposit rates as of 17 April, 2012 

Bank Rate 9.00%
Repo Rate 8.00%
Reverse Repo Rate 7.00%
Cash Reserve Ratio (CRR 4.75%
Statutory Liquidity Ratio (SLR) 24.0%
Base Rate 10.00%–10.75%
Reserve Bank Rate 4%
Deposit Rate 8.50%–9.25%

Bank Rate: RBI lends to the commercial banks through its discount window to help the banks meet depositor’s demands and reserve requirements. 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 it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 13 Feb, 2012 the bank rate was 9.5%.

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 3% 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 affect 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 4.75%. ( As on Date- 9 March, 2012).

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.

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.

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 24% 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.