New Policy Rates by RBI in Indian Banking (as on Dec 04, 2020):
- SLR Rate : 18.00%
- CRR : 3.00%
- MSF : 4.25%
- Repo Rate : 4.00%
- Reverse Repo Rate : 3.35%
- Bank Rate : 4.25%
New Lending/ Deposit Rates By RBI (as on Dec 04, 2020):
- Base Rate : 7.40% - 8.80%
- MCLR (Overnight) : 6.60% - 7.10%
- Savings Deposit Rate : 2.70% - 3.00%
- Term Deposit Rate > 1 Year : 4.90% - 5.50%
(Upcoming RBI Credit Policy : Feb 04, 2021)
What is Bank Rate?
The rate at which banks borrow money from the RBI without any sale of securities is called the Bank rate. Unlike Repo Rate, there is no sale of security in Bank Rate. Such money is borrowed by banks comparatively for a longer period of time.
Bank rate is determined by the RBI based on the demand and supply of money in the economy.
If the bank rate goes up, long-term interest rates also tend to move up and vice-versa.
What is Repo Rate?
When the banks need money to meet their day-to-day obligations, they approach RBI to borrow required money. Repo rate is a rate at which banks borrow money from RBI against the sale of government securities. Repo rate is an abbreviation of Repurchase Rate. This money is borrowed for a short duration, usually up to 2 weeks but mostly overnight. RBI manages this repo rate which is the cost of credit for the bank. The current rates of RBI is SLR 18.00%, CRR is 3.00%, MSF is 4.25%, Repo Rate is: 4.00%, Reverse Repo Rate is 3.35%, and Bank Rate 4.25%.
Banks make an agreement with the RBI to repurchase the same sold government securities at a future date at a pre-determined price. This is a floor rate below which the short-term interest rates cannot go. Higher the repo rate means the cost of short-term money is very high which may slowdown the economic growth. Lower the repo rate means the cost of short-term money is low and when the repo rate is low then banks can charge lower interest rates on the loans taken by its customers and thereby economy growth may get enhanced.
What is Reverse Repo Rate?
When the banks have some surplus funds but any lending or investment option is not available, they approach RBI to deposit such funds with it so that they can at least earn some interest on such funds. Reverse Repo rate is the rate at which banks park their short-term surplus liquidity with the RBI. In other terms, it is the rate offered by RBI when banks deposit their excess funds with the RBI for short term.
It is a tool which is used by the RBI to absorb liquidity from the economy.
When RBI feels that there is too much liquidity in the market, it increases the reverse repo rate. As a result, banks will start keeping more and more surplus funds with RBI and liquidity in the market will get sucked.
What is Cash Reserve Ratio (CRR)?
After we deposit the money in our account with the bank, bank uses that amount to lend it to others e.g. in the form of housing loans, personal loans etc. or to invest somewhere in order to earn money on the deposited amount.
As per the regulations, banks cannot use the whole amount deposited with them for this purpose. Banks are required to maintain a certain percentage of their deposits as cash and can use only the remaining amount for lending/investment. This percentage is known as Cash Reserve Ratio (CRR). CRR is determined by the RBI. Key Rates of Monetary Policy, RBI Policy today, RBI Policy Time, RBI Policy Date Dec 04, 2020.
However, banks do not keep this cash with them, but are required to deposit it with the RBI so that it can help them with cash whenever they need it.
It is a tool which is used by the RBI to maintain proper liquidity in the economy. It uses CRR either to drain excess liquidity from the economy or to inject more funds if needed for the growth of the economy from time to time.
If RBI cuts CRR then the banks will be left with more money to lend or to invest. So, more money will be released into the economy which may propel economic growth.
What is Statutory Liquidity Ratio (SLR)?
Besides CRR, Banks are required to invest a particular percentage of their deposits in specified financial securities such as Gold, Cash or State Government /Central Government securities. This percentage is called as Statutory Liquidity Ratio (SLR). The main point to note here is that banks can earn interest on such investment which is primarily made in government approved bonds, gold, etc. whereas they do not earn anything on the investment made under CRR.
On one side when SLR makes banks safer, it also restricts their capacity to lend on the other side. Hence lowering of SLR by RBI increases the availability of funds with a bank to lend and also helps in controlling the inflation. RBI is empowered to increase this ratio up to 40%.
What is Base Rate?
Base rate is the minimum rate set by the RBI below which banks are not permitted to lend to their customers except for some cases as allowed by RBI.
Following are the exceptions of applicability of Base Rate:
- Loans to banks own employees including retired employees
- Loans to banks depositors against their own deposits
- DRI Advances
It enhances transparency in the credit market and ensures that banks pass on the lower cost of fund to their customers.
Each bank can have only one Base Rate. However, banks are free to choose any benchmark to derive a single Base Rate but the same needs to be disclosed transparently. A bank can change its BR every quarter and also anytime during the quarter.
Many factors, such as the cost of deposits, a bank's profitability in the last financial year, administrative cost of the bank, etc. with stipulated weights, are considered to calculate the Base Rate. Please note that the cost of deposits has the highest weight in the calculation of the Base Rate.
What is Marginal Standing Facility (MSF)?
Marginal Standing Facility (MSF) is a very short term borrowing facility available to the scheduled commercial banks. MSF rate is the rate at which the banks can borrow funds overnight from RBI against government securities. Banks can use this facility only in case of severe cash shortage or acute shortage of liquidity. An increase in the MSF rate results into higher borrowing cost for the banks and hence, reduces money supply in the economy.
The RBI had introduced the marginal standing facility (MSF) in its Monetary Policy (2011-12) and it came into effect on from May 9, 2011. MSF has been introduced by the RBI in order to regulate short-term asset liability mismatch in a more effective manner. Under MSF, banks can borrow funds overnight up to 2% (200 basis points) of their net demand and time liabilities (NDTL). The MSF is maintained at 25 bps higher than the repo rate.
Banks can borrow through MSF on all working days (except Saturdays) between 5:30 pm and 7:30 pm (after the banks have closed their commercial operations for the day) in Mumbai where RBI has its headquarters. The minimum amount which can be borrowed through MSF is Rs. 1 crore and in multiples of Rs. 1 crore thereafter.