RBI Monetary Policy Important Terminology

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Monetary policies are regulated by the reserve Bank of India after every two months

Bank rates : It is the rate at which commercial banks takes loan from RBI without any security. It is used for Long Term borrowing.
Impact:- When Bank rate is increasedInterest rates also increases. It gives negative impact on demand, Thus price increases.

Repo Rate:- It is the rate at which commercial banks borrow funds from RBI against eligible collaterals.
This rate is also known as “Policy Rate” under LAF (Liquidity Adjustment facility)
LAF is a monetary policy which allows banks to borrow money through repurchase Agreements.

  • Repo rate is used for short Term Borrowing

Reverse Repo Rate : – Reverse repo rate is exactly opposite of the repo rate.
It is the rate at which RBI borrow money from the commercial Banks.

Cash Reserve Ratio (CRR) : – It is the ratio which all commercial banks are required to keep in the form of reserves or balances with the RBI.
Impact:- Higher the CRR deposited with RBI – Lower will be the liquidity in the system or vice versa.
It a type of “Dead Money” as commercial banks can not generate any revenue from it.

Statutory Liquidity Ratio (SLR) : – It is that ratio which all commercial banks are required to maintain with the RBI in the form of cash, gold, securities (Bonds) etc.
Impact :-  RBI can reduce the money supply in the market by increasing SLR thereby controlling inflation (Dear money policy) or RBI can promote growth by decreasing SLR thereby increasing the money supply (cheap money policy).

Marginal standing Facility (MSF) Rate :- commercial banks can borrow overnight funds from RBI in order to meet their additional liquidity requirements under the MSF against their SLR holdings

  • RBI has brought a new method of setting the lending rates by commercial banks under the name of MCLR.
  • It has modified the existing base rate system from April 2016 onwards.
    Exp. – RBI under its Bi-monthly (60 days) monetary policy reviews the Bank rate, CRR, SLR, Repo rate etc.


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