CRR, Repo rate, reverse repo rate

  • Cash reserve ratio is the amount of funds that the banks have to keep with the RBI .If the central bank decides to increase the CRR, the available amount with the banks comes down.
  • The RBI uses the CRR to drain out the excessive money from the system. Scheduled banks are required to maintain with the RBI an average cash balance, the amount of which shall not be less than 4% of the total of the net demand and time liabilities.
  • Reverse repo rate is the rate at which the RBI borrows money from commercial banks. The rate at which the RBI lends money to commercial banks is known as repo rate .It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow money from the RBI.
  • Statutory liquidity ratio(SLR) is the term used for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers.

  Q. Which of the following also acts as a mechanism for government lending. 1. CRR 2. Repo rate 3. Reverse repo rate 4. SLR Select the correct answer using the codes given below. a) 1 and 3 only b) 1, 2 and 4 only c) 1 and 4 only d) 4 only Solution d) 4 only. SLR, statutory liquidity ratio is the amount of money that is invested in certain specified securities predominantly central government and state government securities. Investing in government securities by bank is one way of fulfilling the requirement of SLR. In this way, SLR acts as a lending mechanism to government. Repo rate is a rate at which banks borrow from RBI for short periods up to 7 or 14 days but predominantly overnight.