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Current CRR Rate, Repo Rate, Reverse Repo Rate and SLR of 2023

What is a CRR?

The Cash Reserve Ratio (CRR) constitutes a designated portion of the total deposits that commercial banks are obligated to retain as a reserve, as stipulated by the Reserve Bank of India (RBI). This specified amount is held in reserve in the form of either cash or cash equivalents, safeguarded within the bank’s vault, or transmitted to the RBI. The primary purpose of CRR is to ensure that banks maintain a sufficient reserve to prevent liquidity shortages.

In India, the determination of the Cash Reserve Ratio is undertaken by the Monetary Policy Committee (MPC) as part of the regular Monetary and Credit Policy reviews. A lower CRR results in heightened liquidity within the bank, facilitating increased investment and lending activities, and conversely, a higher CRR has a detrimental effect on the economy, reducing the availability of loanable funds. Consequently, this slowdown in investment diminishes the overall money supply in the economy.

Significance of CRR

CRR serves as a crucial instrument within Monetary Policy, yielding several advantages:

  • Regulation of Money Supply and Inflation: CRR effectively governs the money supply in the country, influencing the level of inflation.
  • Security of Reserved Amount: The specific portion of a bank’s deposit earmarked by CRR is securely held with the Reserve Bank of India, ensuring its immediate availability as per customer needs.
  • Role in High Inflation Scenarios: In times of elevated inflation, the Reserve Bank of India can raise the CRR rate. This strategic move curtails the excess availability of money in the economy, contributing to inflation control.
  • Facilitating Government Funding Needs: To address fund requirements, the government has the flexibility to lower the CRR rate. This adjustment aids banks in extending loans to diverse businesses and industries for investment purposes. A reduced CRR rate also fosters economic growth.

In essence, CRR plays a multifaceted role, influencing economic variables such as inflation, liquidity, and growth, thereby contributing to the overall stability and functionality of the financial system.

Major Components of Repo Transaction

Several integral components characterize Repo Transactions, pivotal for securing approval from the Reserve Bank of India (RBI) when engaging in transactions with banks:

  • Management of Economic Pressures: The Repo Rate, subject to adjustment by the RBI based on prevailing inflation levels, becomes a key tool for economic regulation, influencing the nation’s economic trajectory.
  • Short-Term Borrowing Dynamics: Commercial banks may access short-term loans from the RBI, contingent upon their commitment to repurchase depository securities at a predetermined price within a specified timeframe.
  • Roles of Buyer and Seller: The two principal participants in a repo transaction are the buyer (commonly termed the repo lender) and the seller (referred to as the repo borrower). The buyer acquires securities from the seller, who, in turn, commits to repurchasing them at an agreed-upon price and date.
  • Acceptance of Securities & Collateral: In addition to conventional transactions, the RBI accommodates collateral in the form of gold and bonds, providing flexibility and security within repo dealings.
  • Preservation of Liquidity: Banks, upon borrowing from the RBI, retain the funds as a precautionary measure, bolstering liquidity and ensuring a robust financial stance.

These components collectively shape the landscape of Repo Transactions, emphasizing the pivotal role they play in the regulatory framework and liquidity management overseen by the RBI.

Current CRR Rate, Repo Rate, Reverse Repo Rate, Bank Rate, SLR Rate in 2023

Economic dynamics are influenced by interest rates, with key rates set as follows: the Repo Rate at 5.90% governs bank loans, the Reverse Repo at 3.35% manages excess funds, the CRR Rate at 4.50% regulates reserves, the Bank Rate at 6.15% pertains to borrowing, and the SLR Rate at 18% is linked to assets.

Updated Rates of 2023
Repo Rate 5.90 %
Reverse Repo Rate 3.35 %
Cash Reserve Ratio CRR Rate 4.50 %
Bank Rate 6.15 %
Statutory Liquidity Ratio (SLR) Rate 18 %

What is Repo Rate?

  1. The Repo Rate is a fundamental tool in central banks’ monetary policy, regulating liquidity, money supply, and interest rates in an economy.
  2. It represents the interest rate at which the central bank lends short-term funds to commercial banks, utilizing eligible securities like government bonds or treasury bills as collateral.
  3. The term ‘Repo’ signifies ‘Re-purchasing Option’ or ‘Repurchase Agreement,’ wherein commercial banks agree to the central bank’s right to repurchase securities in the future at a predetermined price, usually higher than the initial transaction.
  4. This mechanism allows for effective control and management of liquidity in the financial system.
  5. In the context of India, the Reserve Bank of India holds the authority to determine the repo rate, influencing the overall economic environment.

Repo Rate and Reverse Repo Rate

The repo rate, defined as the interest charged by the Reserve Bank of India when lending funds to commercial banks, is a crucial financial parameter. The term ‘Repo’ is a technical abbreviation for ‘Repurchasing Option’ or ‘Repurchase Agreement.’ Both parties involved must sign a repurchase agreement, outlining the repurchasing of securities on a specified date at a predetermined price. The Reserve Bank of India exercises control over the repo rate in the country.

Changes in repo rates have a direct impact on the economy. A reduction in repo rates contributes to enhanced growth and economic development. Lowering the repo rate prompts banks to decrease their lending rates, benefiting retail loan borrowers.

Reverse Repo Rate

The reverse repo rate is the interest rate at which the Reserve Bank of India borrows funds from commercial banks. Alternatively, it can be described as the rate charged by Indian commercial banks to deposit their surplus funds with the RBI for a brief period. As of May 2022, the reverse repo rate in India stands at 3.35%. This rate is a significant tool in monetary policy, playing a crucial role in regulating the country’s money supply.

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What is Cash Reserve Ratio?

Commercial banks are required to retain a certain minimum amount of customer deposits as reserves, either in cash or as deposits with the central bank, this is known as Cash Reserve Ratio (CRR). The CRR is determined in accordance with the policies of the nation's central bank.

What is the repo rate?

Repo rate (short-term borrowings) is the interest rate at which a nation's central bank loans money to commercial banks in the event of a shortage of funds. Monetary authorities use the repo rate to manage inflation.

What is the importance of repo rate?

The primary importance of the Repo rate is to control inflation. It is done by the central banks to raise the repo rate since doing so discourages banks from borrowing from them. In the end, this lowers the amount of money available to the economy, which aids in halting inflation.

What is the reverse repo rate?

The rate at which a nation's central bank, borrows money from domestic commercial banks is known as the reverse repo rate. The country's money supply can be regulated using this tool of monetary policy.

What is the importance of Cash Reserve Ratio?

Cash Reserve Ratio prevents banks from running out of money while trying to fulfill depositors' payment obligations. The CRR is an essential tool for monetary policy and is used to manage the money supply in an economy. The amount designated as the CRR is kept in cash and currency equivalents, which are either parked with the Reserve Bank of India or kept in bank safes.

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