26 October 2008
Repo ,Reverse repo,Bank rate,CRR(cash reserve Ratio),SLR(Statutory Liquidity ratio)are the tools used by RBI for economic stability and maintaining the growth of the economy.
CRR is the Percentage of deposits every bank has to keep in its account with RBI.Thus bank cannot use such money for lending purposes and thus increase/decrease of this ratio is used by the RBI as a tool to curtail/inject liquidity in the system respectively.Since banks does not earn any interest on such balances with RBI it increases there cost of funds and consequetively there net interest margins(NIM) come under pressure .Due to this banking sector stocks falls generaly after CRR rate hike.Moreover to maintain NIM in the situation of CRR hike banks are forced to increase there lending rates due to which interest cost of corporates increases and consequently there profit groth rate falls and this results in market crash.
SLR is the percentage of deposits every bank has to keep in the form of approved Govt securities.SLR rate uptil now is 25 % but recently to inject liquidity in the wake of Global financial crisis govt reduces it to 23.5 %.Any change in this rate affects Govt borrowing programme as banks purchase govt securities for meeting there SLR requirements. Banks can thus sell there surplus securities and use the consideration for giving more loans.
Bank rate is the rate at which central bank discount bills of commercial banks i.e it is the rate at which RBI lends money to banks for long term.Since due to uncertain environment banks are not intrested in such loang term borrowing so bank rate has lost much of its significance.Presently it is 6%
Repo rate is the rate at which RBI lends money to commercial banks against aprroved govt securities .Thus any change in this rate effects the NIMS of the banks and interest cost of corpoarets which effect the Stock prices of securities affect overall market sentiments. Besides these there are lot of other indirect reasons which affect the prices of securities in the event of such rate changes
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