Whenever we read the headlines of the business daily about the change of the rates by the Reserve Bank Of India (RBI). We think of it how a change in a rate has an effect on some of the important issues which the economy deals with like inflation, fluctuations in the lending rates etc.
This is because the RBI deals with the supply of money in our economy and the cost of credit.
By fluctuating the cost of credit, the RBI helps to deals with the supply of money in the economy because the money only deals with the purchasing power of the people as well as their growth. But the central bank also has to maintain a suitable environment so that the inflation should not go out of the permissible limits.
Now we would like to know some of the rates which the RBI deals with and also the banks working for the people in the country –
1. Repo Rate – it is also known as repurchase rate. It is the rate at which the banks borrow the money from RBI by selling their security ( or bond ) to the RBI to be purchased later on at a prefixed price. It is generally for a short duration of time.
It is like taking money from a bank by furnishing some security in lieu of the amount of loan.
Currently this rate is 7.250%.
2. Bank Rate – It is similar to the repo rate but the basic difference is that in this situation the bank has to pay some interest as there is no sale of security by the bank to the central bank. It is basically for a longer duration.
Currently this rate is 8.25%.
3. Reverse Repo Rate – As the name suggests it is opposite of the repo rate; it is the rate at which the central bank borrows the money from the banks and give them interest. This is usually done by the central bank at the time when there is excess money in the economy; then it increases the rate so that the banks lend money to the central bank.
Currently the rate prevailing right now is 6.25%.
4. Call Rate – It is the rate at which the banks on their own lend and borrow from each other on daily basis for their short term requirement.
5. Cash Reserve Ratio – It is the ratio of total deposits they have which is to be maintained with the Reserve Bank ; they cannot lend this money to any of its customers. No interest is given on them.
Currently this ratio is 4%.
6. Statutory Liquidity Ratio – It is the ratio which needs to be maintained by the bank at the end of each business day in the form of gold , cash , government bands , or other securities. Here it is done for the same purpose as CRR but here bank may earn some interest or capital appreciation.
Currently this ratio is set at 21.5%.
All these rates some or the other way are linked with the flow of money as well as the demand and supply of the same. These rates are determined by the central bank by considering many factors so that the money supply , growth , liquidity and the purchasing power could be maintained in a safe and prosperous manner.
Written and Posted by
SAMIR DEWAN
CAclubindia
