What is Bank rate?   Bank Rate is the rate at which central bank of the country  (in India it is RBI)  allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Base Rate / Benchmark Prime Lending Rate.  Thus any revision in the Bank rate indicates that it is likely that interest rates on your deposits are likely to either go up or go down, and it can also indicate an increase or decrease in your EMI.

           

What is CRR?    The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and has come into force with its gazette notification. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate.  [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and 20 per cent of total of their demand and time liabilities].
RBI uses CRR either to drain excess liquidity or to release funds needed for the growth of the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Thus we can say that this serves duel purposes i.e.(a)  ensures that  a portion of bank deposits is kept with RBI and is totally risk-free, (b) enables RBI to  control liquidity in the system, and thereby, inflation by tying the  hands of the banks in lending money.

What is SLR? Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).  RBI is empowered to increase this ratio up to 40%.  An increase in SLR  also restrict the bank’s leverage position to pump more money into the economy.

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive.  Therefore, we can say that in case,  RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI.  The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns.     An increase in the reverse repo rate  means that the RBI is ready to borrow money from the banks at a higher rate  of interest. As a result, banks would prefer to keep more and more surplus funds with RBI.

Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks

The policy announcements on 03/05/2011, indicates that now repo rate has become the only independent variable policy rate, marking a shift from earlier method of calibrating various policy rates separately. The reverse repo rate -- the rate at which RBI borrows – will be kept 100 basis points lower than the repo rate. On the other hand Marginal Standing Facility (MSF) rate will be kept 100 basis points higher than the repo rate.
 

 NEw 

Continuing with its anti-inflationary stance, the Reserve Bank of India (RBI) has raised the benchmark interest rates by quarter of a percent point on Friday, while keeping cash reserve ratio (CRR) rate unchanged.

The decision comes as the authorities struggle to control near double-digit inflation, which is uncomfortably high for more than two years.  

The repo rate now stands at 8.25%, while the reserve repo gets adjusted to 7.25%. The CRR remains unchanged at 6%.

The hike in rates was along expected lines. In a poll of bankers and economists by CNBC-TV18, 70% said the RBI will hike rates by 0.25% while only 20% believed that there will be no hike this time.

The RBI has been one of the most aggressive central banks in the world, however, price pressures still remain high, mainly due to strong demand pressures that have spread from food to other commodities.

The wholesale price index, India's main inflation gauge, rose 9.78% in August, higher than the median forecast for a 9.6% rise in a Reuters's poll and above the 9.22% recorded for July.

Inflation has been much above the comfort zone, the RBI official told reporters adding, "We will continue with the current anti-inflationary stance."

The RBI monetary tightening is impacting the country's economic growth, finance minister Pranab Mukherjee told reporters on Friday, after the central bank delivered its 12th rate hike in the last 18 months. "I am hopeful the measures taken will help control inflation," he said adding, "…headline inflation is a matter of concern."

He was also optimistic of growth picking up in the second half of the year.

When the repo rate increases, borrowing from RBI becomes more expensive. As a result, all loans -- personal and corporate -- are likely to become costlier and home loan EMIs will increase once banks hike their base rate - the rate to which most retail loans are pegged.

RBI believes the global economic environment has worsened and the recent developments in them a matter of "serious concern". It sees a downside risk to July growth projection.

"The pace of exports is unlikely to sustain on weak demand," RBI said.

GDP growth during the first quarter (April-June) of the 2011-12 financial year moderated to an 18-month low of 7.7% from 8.8% in the corresponding period year ago, following a slowdown in industrial output growth during July to 3.3%, the lowest in 21 months.