High Powered money: It is the money produced by the central bank and the Government and held by the public and banks. H ‘reserve money’. H is the sum of i) currency held by the public(C), ii) cash reserves of banks(R) & iii) other deposits of the Central bank(OD). High-powered money is a macroeconomic term referring to the monetary base — that is, to highly liquid money and includes currency and vault cash.
CRR: The reserve requirement (or required reserve ratio or cash reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. It would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank. These deposits are designed to satisfy cash withdrawal demands of customers. CRR is also called the Liquidity Ratio as it seeks to control money supply in the economy. An increase in CRR decreases the money with the banks and henece drains out excess liquidity from the system. Currently CRR is 5.00%.
SLR: Statutory Liquidity Ratio or SLR refers to the amount that all banks required to maintain in cash or in the form of Gold or approved securities. Here by approved securities we mean, bond and shares of different companies. This Statutory Liquidity Ratio is determined as percentage of total demand and percentage of time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers on their anytime demand. The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered as time liabilities. Statutory Liquidity Ratio (SLR) is a term used in the regulation of banking in India. It is the amount which a bank has to maintain in the form:
1. Cash
2. Gold valued at a price not exceeding the current market price
3. Unencumbered approved securities (Government securities or Gilts come under this) valued at a price as specified by the RBI from time to time.
Currently SLR is 25.00%.
Bank Rate: It is also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply. Currently bank rate is 6.00%.
REPO Rate: Repo rate is the rate at which our banks borrow rupees from RBI. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash); to contract the money supply it increases the repo rates. Alternatively, the central bank decides on a desired level of money supply and lets the market determine the appropriate repo rate. Currently Repo rate is 4.75%.
Reverse Repo Rate: Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to these attractive interest rates. It can cause the money to be drawn out of the banking system. Currently Reverse Repo rate is 3.25%.
The post is contributed By Aditya Manishi
Another excellent article. wef 8th Nov, 2009, the current SLR of India has been dropped to 24% instead of 25%. I am literally confused between bank rate and repo rate. By the Central Bank we again mean RBI(in India). In both the cases, commercial banks borrow from RBI in order to meet the short term imbalance between demand and supply of liquidity. Then way does some of the sites argue that bank rates play a role in deciding LONG TERM interest rates. Repo rate is the rate at which banks borrow funds from the RBI. Bank Rate is the rate at which RBI lends money to other banks (or financial institutions). I know they are not same as they sound , however I dont have a concrete contrast between them.
ReplyDeleteI also want to discuss another macroeconomic variable called Call Rates. Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Si nce banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis.
Thanks! Waiting for the answer,
Abhishek Kr Sinha.
Dear Abhishek,
ReplyDeleteI was just going through the blog and read your post. I will answer your question once my exams are over. The SLR is till 25%. Please check RBI website. Also, can you post the weblink of the article that you are refering to i.e. 8th Nov.
Thanx
Extremely sorry for replying late. It is difficult to trace the linke. Well one of them was http://www.allbankingsolutions.com/CRR-SLR-BANK-RATE-REPO-REVERSE.HTM .In the bank rate definition only you will find that it is used for short term purposes only. However, for the next definition in lay man terms it argues that if the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. I dont think that long term interest rates can be predicted! May be my interpretation is wrong.
ReplyDeletethe diffrence between bank rate and repo rate...
ReplyDeleteBoth bank rate and repo rate are interest rates at which commercial banks borrow from the RBI. The essential difference is that bank rate is what is used for what is called "clean borrowing" and this is generally for a bit longer-term. For instance, a commercial bank may simply borrow from RBI promising to pay 9% pa on the loan from RBI. This is akin to the normal personal loan that we get from banks except in this case the central bank is the lender.
Repo rate is basically the rate charged on this thing called a repo or "repurchase agreement". Essentially, a repurchase agreement is an agreement between one party and another in which the former sells a security (like a bond) to the latter with a promise to buy it back after a particular period. For instance, a bank may enter into a repo with RBI, selling a security to RBI and then tell RBI that I will buy this security back from you after 3-months. RBI tells the bank...OK I will pay Rs. 100 for this security now but when you buy it back from me, please pay me Rs. 103. The extra Rs. 3 that RBI charges constitutes the repo rate. Hence, repos are a form of "collaterlised or secured borrowings" in which the borrower must place a collateral with the lender (in this case RBI). If the borrower does not manage to buy back the security, the lender can redeem its collateral value. Generally, repos are used for managing domestic liquidity in the economy. a bank rate has a direct impact on borrowing costs for banks. Furthermore, repos are short-term agreements and are entered into by banks to meet short-term shortfalls in their liquidity positions. By raising the repo rate, RBI signals to the commercial banks that .... hey look, I will still be willing to enter into repurchase agreements with you all but you better pay a higher interest to me. The banks understand this extra cost and cut back on lending to hold more cash or other liquid assets just in case they have liquidity issues as now it's more expensive to get funding from RBI. Hence, repo rate has an impact on total Money supply and hence inflation.
Essentially, both rates are instruments of monetary policy. The idea is the same for both. They are merely different in how quickly they impact money supply or growth.
Hope this helps.
Regards
charu gupta
Thanks a lot!! Lucidly explained.
ReplyDelete