RBI updates Monetary Policy

  • Reverse Repo Rate: When Reserve Bank of India faces a financial crunch, they invite commercial banks and other financial institutions to deposit their excess funds into RBI treasury and offers them excellent interest rates. Similarly, when banks have excess funds, they voluntarily transfer it to RBI as their money is safe and secure with them. Generally, Reverse Repo Rate is always lesser than Repo Rate. The current Reverse Repo Rate as set by the apex bank is 4.00% p.a.

  • Marginal Standing Facility Rate (MSF): When banks face acute financial shortage, they can avail this special facility offered by RBI. In MSF, banks can borrow cash from RBI against their approved government securities. This option is preferred during emergency and critical situations only. MSF rate is always higher than Repo Rate as banks need the funds instantly. The MSF rate currently stands at 4.65% p.a
  • Bank Rate: Bank Rate is the rate of interest charged by The Central Bank of India against loans offered to commercial banks. Bank rate is usually higher than repo rate. Unlike repo rate, bank rate directly affects the end user, in this case the customer, as high bank rates mean high lending rates. When bank pay high interest rate to obtain loan from RBI, they in return charge the customer high interest rate to break even. Also known as “Discount Rate”, bank rate is a powerful tool used by the RBI to control liquidity and money supply in the market. The current Bank Rate is the same as MSF rate, i.e. 4.65% p.a.
  • Cash Reserve Ratio (CRR): In India, banks are required to retain a certain percentage of their deposits as liquid cash. However, banks prefer to deposit this liquid cash with the Reserve Bank of India, which is equivalent to having cash in hand. The percentage of the deposits that should be kept aside by banks is called Cash Reserve Ratio. CRR is fixed by The Reserve Bank of India. For example: If the bank deposit amount is Rs.100 and the CRR is 10% per annum, the liquid cash that the bank should have at all times is Rs.10. The remaining funds, which is Rs.90 in this case can be used for lending and investment purposes. RBI has the power to determine the lending capacity of the banks in India through CRR. They will increase CRR if they want to reduce the amount that the banks can lend and vice versa. The current CRR is 3% p.a.
  • Statutory Liquidity Ratio (SLR): At the end of every business day, banks are required to maintain a minimum ratio of their Time liabilities (when the bank has to wait to redeem their liabilities) and Net Demand (when bank can withdraw money from these accounts immediately) in the form of liquid assets like gold, cash and government securities. The ratio of time liabilities and liquid assets in demand is called Statutory Liquidity Ratio or SLR. The maximum SLR that The Reserve Bank of India can set is 40% p.a. However, the current SLR is set at 16.25% p.a.
  • Base Rate: The Reserve Bank of India sets a minimum rate below which banks in India are not allowed to lend to their customers. This minimum rate is called the Base Rate in banking terms. It is the minimum rate of interest the banks are permitted to charge their customers. The new Base Rate as fixed by RBI is 8.15% to 9.40% p.a.
  • Marginal Cost of Funds based Lending Rate (MCLR): RBI made changes to the existing Base Rate system this year. They have introduced Marginal Cost of Funds based Lending Rate or MCLR which is a new methodology to set the lending rates for commercial banks. Previously, banks used to lend as per the Base Rate fixed by The Reserve Bank of India but with the introduction of MCLR, banks will have to lend using rates linked to their funding costs. Simply put, bank raises their funds through deposits, bonds and other investments. For the banks to function smoothly, there are costs involved like salaries, rents and other bills. Considering that banks also need to make profits every year, RBI has included the expenses of the bank and have come up with a formula which can be used by banks to determine their lending rate. With the reduction of repo rate, some banks have reduced MCLR up to 90 basis points. The current MCLR (overnight) fixed by the RBI stands at 7.40% to 7.90%.
  • Savings Deposit Rate: The interest rate earned by an account holder for the amount maintained in their savings account is called savings deposit rate.3.25%-3.50%
  • Term Deposit Rate: Customers who deposit money into their account and agrees to fix it till a particular date is awarded with term deposit rate. The term deposit rates for senior citizens is usually 0.5% more than that for ordinary citizens. The revised interest rate of Term Deposits that the Reserve Bank of India has set ranges from 5.90% to 6.40%.

COMPLETE CHART OF Indian Rates

Policy Repo Rate : 4.40%
Reverse Repo Rate : 4.00%
Marginal Standing Facility Rate : 4.65%
Bank Rate : 4.65%
CRR : 3%
SLR : 16.25%
Base Rate : 8.15% – 9.40%
MCLR (Overnight) : 7.40% – 7.90%
Savings Deposit Rate : 3.25% – 3.50%
Term Deposit Rate > 1 Year : 5.90% – 6.40%

Last Updated on: 27/03/2020 By Learning Sessions

Accounting & Finance for Banking

Principles & Practices of Banking Module E Pdf

Free
Module E PPB ePDFs available in our android app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Leave a reply

Please enter your comment!
Please enter your name here

Learning Sessionshttps://iibf.info
Btech, JAIIB CAIIB and a tutor. Have taken more than 400+ hours online classes with more than 1,00,000 students

Popular

Free Live Classes

More from author

[NEW] Asset Reconstruction Company Norms

RBI has put restriction on the ARCs from buying financial assets from its sponsor firms and lenders (bank or financial institution) on a...

Jaiib 2021 Exam Syllabus, Dates, Pattern and Fee all Details

JAIIB EXAM Dates 2021 Junior Associate of the Indian Institute of Bankers Exam or JAIIB, as commonly called, is conducted as a career progression exam...

What is BANK RECONCILIATION STATEMENT? BRS in Detail

Bank Reconciliation Statement is a statement prepared to reconcile the balances of cash book maintained by the concern and pass book maintained by the...

Latest Exposure Norms in Banks by RBI

Exposure Norms OVERALL EXPOSURE LIMITS As prudential measure aimed at better risk management a avoidance of concentration of credit risks, RBI has advised the banks to...