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Home / IAS Preparation / CRR Rate, Repo Rate, Reverse Repo Rate, Bank Rate

Current CRR Rate, Repo Rate, Reverse Repo Rate & SLR of 2023: Know Definition & Importance

Last Updated on Aug 17, 2023
Also Read CRR Rate, Repo Rate, Reverse Repo Rate, Bank Rate in Hindi
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The Cash Reserve Ratio CRR in India is one of the most important tools used in monetary policy by the Reserve Bank of India. Monetary policy is a process to monitor and regulate the supply of money in a particular economy by a country's supreme monetary Authority of a country.

The Reserve Bank of India (RBI) provides various guidelines on maintaining the Cash Reserve Ratio (CRR) to different commercial banks in India, which they have to maintain under all circumstances. The RBI also has the power to change the cash reserve ratio between 3% to 15% under the Reserve Bank of India Act of 1934.

The Repo Rate (RR) is the interest rate commercial banks pay to the Reserve Bank of India when borrowing money from the RBI. In contrast, the reverse repo rate is the interest rate provided to commercial banks by the Reserve Bank of India when the RBI borrows any amount of money from the commercial banks. All these topics will be very important for the candidates for UPSC IAS Examination.

In this article on Cash Reserve Ratio, Repo Rate and Reverse Repo Rate, we shall understand what these terms mean and discuss their significance for the economy. This will be very useful for aspirants in the UPSC Prelims Exam.

Also, study Pradhan Mantri Mudra Yojna from the linked article.

Current CRR Rate, Repo Rate, Reverse Repo Rate, Bank Rate, SLR Rate in 2023

Interest rates guide the economy: Repo Rate 5.90% for bank loans, Reverse Repo 3.35% for excess funds, CRR Rate 4.50% reserves, Bank Rate 6.15% borrowing, SLR Rate 18% assets.

Updated Rates of 2023

Repo Rate

5.90 %

Reverse Repo Rate 

3.35 %

Cash Reserve Ratio CRR Rate

4.50 %

Bank Rate

6.15 %

Statutory Liquidity Ratio (SLR) Rate

18 %

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What is CRR - Cash Reserve Ratio?

The Cash Reserve Ratio (CRR) is a monetary policy tool used by the Reserve Bank of India (RBI) to regulate commercial banks' liquidity and lending capacity. CRR refers to the portion of a bank's total deposits that it must maintain with the central bank in cash reserves. It is a percentage of the bank's net demand and time liabilities.

  • Under the Reserve Bank of India Act of 1934, The Reserve Bank of India can set the Cash Reserve Ratio (CRR).
  • The amount of the cash reserve ratio can be transmitted to the Reserve Bank of India, but it must be kept as a reserve in the commercial bank's vault and can take the form of cash or anything that can be used to replace cash.
  • The Monetary Policy Committee of The Reserve Bank of India, which typically meets every two months, decides the percentage of cash reserve ratio that each commercial bank must maintain.

Study the Priority Sector Lending Scheme here.

Major Components of Repo Transaction

The following are some of the major components of the Repo Transaction that are important for the RBI's approval to carry out any transaction with the banks:

  • Avoiding economic squeezes: Depending on the inflation, the Reserve Bank of India can raise or lower the repo rate, controlling the nation's economy in the process.
  • Short-Term Borrowing: The RBI may make a short-term loan to commercial banks as long as those institutions are required to buy back their depository securities at a predetermined price.
  • Buyer and Seller: The two main parties involved in a repo transaction are the buyer (often referred to as the repo lender) and the seller (often called the repo borrower). The buyer purchases the securities from the seller, while the seller agrees to repurchase them at a predetermined price and date.
  • Securities & Collateral: The RBI also accepts collateral in the form of gold and bonds.
  • Liquidity: The money that the banks borrow from the RBI is kept on hand as a safety measure to sustain liquidity.

Importance of the CRR - Cash Reserve Ratio

  • The main significance of the Cash Reserve Ratio (CRR) is to ensure that the banks do not run out of money because of over-borrowing to their customers.
  • If the CRR is set low by the Reserve Bank of India, the amount of liquidity of money or the amount of cash available with the bank increases, which ultimately invests it in various aspects like borrowing from the customers.
  • This increases the risk of higher Non-Performing Assets (NPAs).
  • However, a very high level of CRR can also negatively impact a nation's economy as it lowers the amount of money available to commercial banks, which they can lend to their customers.
  • Thus, this ultimately reduces the amount of spending and investment in an economy.
  • CRR also plays the role of controlling the supply of money and the inflation level in an economy.
  • Suppose the level of inflation is high, which means that the liquidity of money is also high. In that case, the Reserve Bank of India enhances the cash reserve ratio percentage, ultimately reducing the amount of money the commercial banks can lend to their customers.
  • This finally reduces the liquidity of money in an economy and thus reduces inflation.
  • In turn, when the level of inflation is low, which means that the liquidity of money in an economy is also low, then the Reserve Bank of India reduces the cash reserve ratio percentage, which enhances the amount of money available with the commercial banks which they can use to lend more to their customers.
  • This ultimately enhances the amount of spending and investment in the economy, which increases the liquidity of money in the economy, thus helping to solve the problem of low inflation in an economy.
  • When the government feels the need to foster investment, particularly in the private sector, they can request the Reserve Bank of India to lower the value of CRR so that the banks have higher money to lend to their customers, which will ultimately enhance the level of spending and investment in an economy, thus improving the economic productivity of a nation and playing a crucial role in enhancing the per capita income of citizens.
  • Thus, the cash reserve ratio also indirectly enhances the prospects of an ‘Atma Nirbhar Bharat’ and India’s chances of reaching the target of a $5 trillion economy by 2024.

Study the Difference between Ordinary Bills & Money Bills here.

What is Repo Rate?

The Repo Rate is a key monetary policy tool central banks use to regulate an economy's liquidity, money supply, and interest rates. It is the rate at which the central bank lends short-term funds to commercial banks against eligible securities, such as government bonds or treasury bills.

  • The real meaning of the word ‘Repo’ means ‘Re-purchasing Option’ or the ‘Repurchase Agreement.’
  • Under this mechanism, the commercial banks consent to the Central Bank's right to repurchase the securities at a future date for a predetermined price typically greater than the initial price.
  • The Reserve Bank of India has the final say on the repo rate in that country.

Also, read the Difference Between Finance Bill and Money Bill here.

Importance of Repo Rate

  • Any fluctuation in the repo rate has a direct impact on the economy of a nation.
  • When inflation is high, which means that the liquidity of money is also high, then the Reserve Bank of India increases the repo rate, automatically reducing the amount of money available with the commercial banks as they have to pay higher interest to the Reserve Bank of India.
  • This reduces their capacity to lend to their borrowers, which automatically reduces the level of spending, thereby reducing the liquidity of money in the economy.
  • Similarly, when the inflation rate is low, which means that the liquidity of money in the economy is also low, then the Reserve Bank of India reduces the repo rate, which ultimately increases the amount of money available to the commercial banks which they can lend to their borrowers.
  • Thus, this automatically enhances the level of spending and the liquidity of money in that economy.

Also, check the Statutory Liquidity Ratio here.

What is the Reverse Repo Rate?

The Reverse Repo Rate is the interest rate at which the central bank borrows funds from commercial banks for a short-term period. It is the opposite of the repo rate. In a reverse repo transaction, the central bank acts as the borrower, and commercial banks act as lenders, providing funds to the central bank in exchange for eligible securities.

  • When the central bank increases the reverse repo rate, it becomes more attractive for banks to lend funds to the central bank, reducing the available liquidity in the banking system. 
  • This, in turn, can impact interest rates, as banks have fewer funds to lend to businesses and consumers. 
  • When the central bank decreases the reverse repo rate, it encourages banks to lend more, potentially stimulating economic activity.
  • The reverse repo rate and the repo rate are important components of a central bank's monetary policy toolkit. 
  • It helps the central bank manage liquidity, stabilize interest rates, and achieve its monetary policy objectives, such as controlling inflation and ensuring financial stability. 
  • The reverse repo rate may vary across countries and central banks based on economic conditions and policy objectives.

Study the Salient Features of the Indian Constitution here.

Importance of the Reverse Repo Rate

The central bank may raise or lower the reverse repo rate depending on macroeconomic conditions.

If the central bank increases the Reverse Repo Rate

A rise in the reverse repo rate encourages banks to temporarily deposit their surplus cash with the central bank, which reduces liquidity in the banking system and across the economy. In other words, the RBI receives excess funds from banks overnight in exchange for the security of government assets.

If the central bank decreases the Reverse Repo Rate

Banks receive less interest on their excess funds deposited with the Reserve Bank of India if RBI decides to lower the reverse repo rate. The liquidity in the economy rises due to the banks’ increased investment in lucrative routes like money markets.

The availability of other potentially less hazardous and similarly lucrative investment possibilities and the bank’s internal liquidity condition will all play a role in the decision, which may or may not result in reduced interest rates on loans for the customers.

What is Statutory Liquidity Ratio (SLR) Rate?

The Statutory Liquidity Ratio (SLR) is a regulatory requirement imposed by the central bank on commercial banks in certain countries, including India. It mandates that a certain percentage of a bank's net demand and time liabilities (NDTL) be maintained through specified liquid assets, such as cash, gold, or approved government securities. The SLR rate is the percentage of NDTL that banks must keep as liquid assets. It is set by the central bank, such as the Reserve Bank of India (RBI), in the case of India. 

Working of Statutory Liquidity Ratio (SLR) 

  • By the end of the day, each bank must have a specific amount of its Net Demand and Time Liabilities (NDTL) in cash, gold, or other liquid assets. 
  • The Statutory Liquidity Ratio is the ratio of these liquid assets to the demand and time liabilities (SLR). This ratio may be raised by up to 40% at the discretion of the Reserve Bank of India (RBI).
  • An increased ratio hampers the bank’s capacity to inject money into the economy. 
  • For the Indian economy to function, the RBI is also in charge of controlling the movement of money and maintaining price stability. 
  • Therefore, SLR is crucial in safeguarding the banks’ viability and the economy’s cash flow, among other tools. 

Importance of the Statutory Liquidity Ratio (SLR)

  • To prevent commercial banks from over-liquidating: When the Cash Reserve Ratio increases and the bank desperately needs money, over-liquidation might occur without SLR. 
  • SLR regulation is a tool used by RBI to manage bank credit. SLR makes ensuring that commercial banks are solvent and that they invest in government securities.
  • To change the direction of the flow of bank credit: In periods of inflation, the Reserve Bank of India increases SLR to limit bank credit. Similarly, it lowers SLR during a recession to boost bank credit.
  • Maintaining the base rate, also known as the minimum rate, at which Indian lenders can grant loans to their clients is one of the key functions of SLR. 
    • SLR significantly contributes to increasing transparency between the RBI and other Indian banks. The RBI decides the SLR.

Bank Rate

The central bank sets the bank rate when lending money to commercial banks. Bank rates influence commercial banks’ lending rates. Banks will charge greater interest rates on their loans when bank rates rise. The central bank may increase the bank rate to reduce liquidity and vice versa. When the central bank raises the Bank Rate, commercial banks’ borrowing costs rise, constricting the amount of money available on the market.

Check out the Test Series for UPSC IAS Exam here.

Cash Reserve Ratio, Repo Rate, Reverse Repo Rate (UPSC Economy): Download PDF Here!

We hope all your doubts regarding the Cash Reserve Ratio, Repo Rate and Reverse Repo Rate will be cleared after going through this article. You can download the Testbook App now to check out various other topics relevant to the UPSC IAS Exam.

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Cash Reserve Ratio, Repo Rate and Reverse Repo Rate FAQs

Commercial banks are required to retain a certain minimum amount of customer deposits as reserves, either in cash or as deposits with the central bank, this is known as Cash Reserve Ratio (CRR). The CRR is determined in accordance with the policies of the nation's central bank.

Cash Reserve Ratio prevents banks from running out of money while trying to fulfill depositors' payment obligations. The CRR is an essential tool for monetary policy and is used to manage the money supply in an economy. The amount designated as the CRR is kept in cash and currency equivalents, which are either parked with the Reserve Bank of India or kept in bank safes.

The role of the Cash Reserve Ratio is to ensure that a part of the bank's deposit is kept safe with the Central Bank. The other role of the Cash Reserve Ratio is to keep inflation in control. When there is significant economic inflation, the RBI increases the CRR to lower the amount of cash available to banks for loan approvals

Repo rate (short-term borrowings) is the interest rate at which a nation's central bank loans money to commercial banks in the event of a shortage of funds. Monetary authorities use the repo rate to manage inflation.

The primary importance of the Repo rate is to control inflation. It is done by the central banks to raise the repo rate since doing so discourages banks from borrowing from them. In the end, this lowers the amount of money available to the economy, which aids in halting inflation.

The rate at which a nation's central bank, borrows money from domestic commercial banks is known as the reverse repo rate. The country's money supply can be regulated using this tool of monetary policy.
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