Sunday, January 1, 2012

Repo rate, Reverse Repo, Bank rate, Call Rate, CRR, SLR...

Simple definitions....
What is Repo rate (Repurchase rate) and reverse repo rate?
In simple terms, repo rate is the rate at which RBI lend money short term for other commercial banks against securities to increase working capital. Reverse repo is the rate at which RBI borrow money from commercial banks. Generally banks lend money when it has shortage. When the repo rate increases, it becomes expensive for banks to lend money from RBI. When bank has excess money, they invest the money in RBI for short-term for interest. The rate at which RBI borrow money from other banks is reverse repo rate. If the reverse repo increases, commercial banks will have more interest rate and prfit.
A contract in which the seller of securities, such as Treasury Bills, agrees to buy them back at a specified time and price. also called repurchase agreement or buyback.
A purchase of securities with an agreement to resell them at a higher price at a specific future date. This is essentially just a loan of the security at a specific rate. also called reverse repurchase agreement.
Repo rate in 8.5 and reverse repo rate is 7.5 as on December 2011. This may change time to time. Please confirm the same before the interview. RBI has decided that now onwards the Reverse Repo Rate will not be announced separately, but will be linked to Repo rate and it will always be 100 bps (1%) below the Repo rate (till RBI decides to delink the same). As the repo rate in 8.5, reverse repo is 7.5%. To curb inflation RBI has changed the repo rate in 10 times in the last 15 months.
Bank Rate:
Bank rate is the rate at which RBI lend money to commercial banks for short-term. Your obvious question would be how bank rate is different from repo rate. In Repo Rate scenario, commercial banks keep securities to borrow money. The bank agrees to buy back the securities after a specific time at a decided price. In Bank rate scenario, no securities kept for borrowing money. Based on bank rate, interest rate to the customers are decided. Bank rate will have direct impact on the lending rate to the customers. Precisely, if there is an increase in bank rate, loan interest rate also will increase. So bank rate will reflect the long term monitory policy; however repo rate represent short term outlook.
Current bank rate is 6%.
Call rate:
To meet the daily fund requirement, banks lend and borrow money from each other. The rate at which they lend and borrow money is called Call rate.
Current rate is 6%.
CRR is Cash reverse Ratio. Some portion of bank deposit needs to be kept in RBI. For example, if the bank receives Rs.100 as deposit and if the CRR is 5, bank needs to keep minimum Rs.5 with RBI as cash. Bank can only use Rs.95 to lend to the customers. This offers security to the bank. Also RBI has better control over lending power of other banks. This helps RBI in controlling inflation.

Update ....March 9, 2012:
RBI has cut Cash Reserve Ratio (CRR) by 0.75 per cent to 4.75 per cent.
SLR is statutory liquidity ratio. End of every business day, banks are required to invest some portion of their deposit in Government Securities. Banks must maintain some percentage every day as liquid asset like gold, government securities etc. This restricts banks further in lending money or pumping more money into the economy. CRR is always cash, but SLR can be in the form of cash, gold, securities etc. CRR controls liquidity where as SLR controls credit growth.
Current SLR is 24%
MSF is marginal standing facility, came into effect from May 9, 2011. Under this scheme, Banks will be able to borrow upto 1% of their respective Net Demand and Time Liabilities.  The rate of interest on the amount borrowed will be 100 basis points (i.e. 1%) above the repo rate. That would 8.5 + 1 % (9.5%) currently. This scheme is likely to reduce volatility in the overnight rates and improve monetary transmission.


  1. how many types of loan can bank give? by siva rk

  2. Thanks for the suggestion. I have added the same. Broadly two types (secure and unsecure). You can further divide into multiple categories.

  3. Hi wonderful work and thanks for the same.
    if CRR is 6 and SLR 24 then banks can lend from remaining 70 only, is that correct?
    And compared to the REPO rate, bank rate is less and also without any securities, then y bank will take money according to repo rate?
    by Teena