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    Change in CRR, SLR, Repo Rate, Bank Rate and Their Relation With Inflation in India

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    Aanshi Priya
    The document discusses various monetary policy tools used by the Reserve Bank of India (RBI) to manage inflation in India. It explains how changes to the cash reserve ratio (CRR), statutory liquidity ratio (SLR), repo rate, and bank rate impact the money supply and ability of banks to lend, thereby influencing inflation. Increasing these rates reduces money supply and bank lending capacity, which can help control inflation, while decreasing them expands money supply and reduces borrowing costs.

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    Change in CRR, SLR, Repo Rate, Bank Rate and Their Relation With Inflation in India

    Uploaded by

    Aanshi Priya
    66 views10 pages
    The document discusses various monetary policy tools used by the Reserve Bank of India (RBI) to manage inflation in India. It explains how changes to the cash reserve ratio (CRR), statutory liquidity ratio (SLR), repo rate, and bank rate impact the money supply and ability of banks to lend, thereby influencing inflation. Increasing these rates reduces money supply and bank lending capacity, which can help control inflation, while decreasing them expands money supply and reduces borrowing costs.

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    The document discusses various monetary policy tools used by the Reserve Bank of India (RBI) to manage inflation in India. It explains how changes to the cash reserve ratio (CRR), statutory liquidity ratio (SLR), repo rate, and bank rate impact the money supply and ability of banks to lend, thereby influencing inflation. Increasing these rates reduces money supply and bank lending capacity, which can help control inflation, while decreasing them expands money supply and reduces borrowing costs.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    66 views10 pages

    Change in CRR, SLR, Repo Rate, Bank Rate and Their Relation With Inflation in India

    Uploaded by

    Aanshi Priya
    The document discusses various monetary policy tools used by the Reserve Bank of India (RBI) to manage inflation in India. It explains how changes to the cash reserve ratio (CRR), statutory liquidity ratio (SLR), repo rate, and bank rate impact the money supply and ability of banks to lend, thereby influencing inflation. Increasing these rates reduces money supply and bank lending capacity, which can help control inflation, while decreasing them expands money supply and reduces borrowing costs.

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    © All Rights Reserved
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    Change in CRR, SLR, Repo Rate, Bank Rate

    and their relation with inflation in India


    CASH RESERVE RATIO
    Cash reserve ratio (CRR) is the percentage of a bank's total deposits that it needs to maintain
    as liquid cash. This is an RBI requirement, and the cash reserve is kept with the RBI. A bank
    does not earn interest on this liquid cash maintained with the RBI and neither can it use this
    for investing and lending purposes.
    •For example if the CRR is 4.5%, then banks must keep aside Rs. 4.5 every time their deposits
    raise by Rs. 100. Here, the liquid cash that scheduled banks need to maintain with the RBI on a
    fortnightly basis must not fall short of 4.5% of the total Net Demand and Time Liabilities (NDTL)
    that the bank holds.
    •To understand the concept of CRR clearly, consider this example: if a bank has net demand and
    time deposits worth Rs. 10,00,000 and the CRR is 8%, it will have to keep Rs. 8,00,000 with the
    RBI in the form of liquid cash.
    Change in CRR and its relation with
    inflation in India
    •If inflation is high and the supply of money is pushing it higher, the RBI can decide to turn up the
    CRR requirement and thereby reduce the capacity of banks to lend. With less loans there is less
    money flowing through the economy and less pressure on inflation.
    •If the CRR is high, banks have to keep more money with RBI and also the cost to the banks will
    be higher. As a result, you have to pay a higher rate of interest on your borrowings from the
    banks.
    •On the other hand, if RBI cuts the CRR, the cost to banks come down and if banks reduce their
    basic lending rate/ base rate, then your cost to borrowings also comes down and the banks
    reduces the interest rate on your borrowings.
    SLR ( Statutory Liquidity Ratio )
    SLR or the Statutory Liquidity Ratio is the minimum percentage of deposits that a commercial
    bank has to maintain in the form of liquid cash, gold or other securities.
    Change in SLR and its relation with
    inflation in India
    •If the SLR increases, it restricts the bank's lending capacity and helps in controlling the inflation
    by soaking the liquidity from the market.
    •Consequently, banks will have less money available to lend, and they will charge higher interest
    rates on loans to keep up with their profit margin.
    REPO RATE

    •Repo rate also known as repurchase agreement is


    the rate at which banks borrow money from RBI by
    selling its approved securities to RBI.
    • Usually, the money is borrowed for a shorter
    duration of up to 2 weeks.
    •This repo rate is managed by RBI and is a cost of
    credit for the banks.
    Change in SLR and its relation with
    inflation in India
    •Let say a bank borrows Rs. 10,000 from RBI, then at the prevailing repo rate i.e. 6.25% the bank
    have to pay Rs. 625 as interest to RBI.
    •The increase in repo rate increases the cost of short-term money for banks and vice versa. Also,
    higher repo rate may result in the slowdown of the economic growth
    Bank Rate and its relation with inflation in
    India

    •Bank rate is the interest rate at which the central bank lends
    to the commercial banks.
    •When there is inflation, the RBI increases the bank rate to
    reduce the money supply in the economy. By doing this, the
    central bank ensures the commercial banks create less credit
    leading to reduce money supply.
    •With less money, there is lesser demand and hence prices fall.

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