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Impact of Repo Rate, CRR, SLR on Indian Economy

CRR, SLR & Repo Rate

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Page 1: CRR, SLR & Repo Rate

Impact of Repo Rate, CRR, SLRon

Indian Economy

Page 2: CRR, SLR & Repo Rate

Agenda :

1. What is Monetary Policy ?

2. Cash Reserve Ratio (CRR)

How does CRR affect economy ?

3. Statutary Liquidity Ratio (SLR)

How does SLR affect economy ?

4. Repo Rate or Repurchase Rate

What’ll be the consequences of Repo Rate ?

5. Conclusion

Page 3: CRR, SLR & Repo Rate

What is Monetary Policy?

Policy made by the central bank (RBI). To control money supply in the economy. (and thereby fight both inflation and deflation). RBI implements monetary policy using certain tools.

Monetary Policy Tools

Quantitative

Tools

Bank Rate, CRR, SLR, Repo Rate, Reverse

Repo Rate, OMO

Qualitative

ToolsDirect Action, Moral

Persuasion, Legislation, Publicity

Page 4: CRR, SLR & Repo Rate

Cash Reserve Ratio (CRR)

Scheduled Commercial Banks(SCBs) in India are required to hold a certain proportion of their Demand and Time Liabilities with RBI as per Section 42(1) of the Reserve Bank of India Act, 1934.

This minimum ratio is stipulated by RBI and is known as the Cash Reserve Ratio (CRR).

Current CRR Rate is 4%.

Drain out excessive liquidity from the banks

Release funds needed for the growth of the economy from time to time

Secure solvency of the banks

RBI Uses CRR to :

Page 5: CRR, SLR & Repo Rate

How does CRR affect economy ?

When the CRR is -

Hiked Lowered

Banks have less money for lending

To maintain profit margin, banks increase lending rate

Customers borrow less and eventually spend less

Demands for goods and services thus comes down

Slow down in economy

Banks have more money for lending

Lower interest rate

Cheap loan

More people take more loan

Boost in economy

Page 6: CRR, SLR & Repo Rate

Statutary Liquidity Ratio (SLR)

It is the proportion of the total deposits which commercial banks are required to maintain with the Central bank in the form of liquid assets like cash, gold, Govt. Bonds and securities.

SLR = {Liquid assets/(Demand + Time Libilities)} x 100

RBI is empowered to increase this ratio upto 40%

Current SLR rate is 21.5%

To restrict expansion of the bank credit

To increase bank’s investment in Govt. Securities

To ensure solvency of the banks

Objective of SLR :

19%20%21%22%23%24%25%26%

24%25%

24%23%

22.50%22%

21.50%

SLR

Nov-08 Oct-09 Dec-10 Aug-12 Jun-14 Aug-14 Feb-15

Page 7: CRR, SLR & Repo Rate

How does SLR affect economy?

When the SLR is -

Hiked Lowered

Cash reserves of commercial banks decrease

Rate of interest increase

Price of credit increase

Demand for credit decrease

Credit contracts in economy

Cash reserves of commercial banks increase

Rate of interest decrease

Price of credit decrease

Demand for credit increase

Credit expands in economy

Page 8: CRR, SLR & Repo Rate

Suppose economy is showing inflationary trend:

How can RBI stop it using Reserve ratio as a tool?

In this case, RBI should RAISE the reserve ratios.

Observe:

Example Right now: (CRR – 4% & SLR – 21.5%)

Originally:(RBI raises CRR to 15% and SLR

to 40%)

People deposited total this much money in ABC Bank (NDTL) 100 cr. 100 cr.

CRR [ has to keep this much cash aside for reserve] - 4 cr. - 15 cr.

SLR [ABC Bank has to invest this much money in RBI approved

securities]- 21.5 cr. - 40 cr.

Money left with ABC Bank 100 – 4 – 21.5 = 74.5 Cores. 100 – 15 – 40 = 45 Cores.

Page 9: CRR, SLR & Repo Rate

When Raghuram Rajan has raised reserve ratio, money with ABC Bank is reduced from 74.5 crores to just 45 crores.

ABC Bank raises its loan interest rate

Businessmen borrow less money from ABC Bank

Businessmen donot start new business or Donot expand existing business

Result = Less jobs

Result = Less income (Because of above reasons)

Result = Less demand of goods and services (because less income)

Ultimately shopkeeper will bring down the prices to attract people into buying more things

*Thus inflation is reduced.

Consequences:

Page 10: CRR, SLR & Repo Rate

Repo Rate or Repurchase Rate

Repo Rate or Repurchase Rate is the rate at which banks borrow money from the Central Bank (RBI). It is for short period. The banks sell their securities (Financial Assets) with an agreement to repurchase it at future date at

predetermined price. Current Repo Rate is 6.75%.

What if the Repo Rate is –

LoweredHiked

Decrease in money supply

Discourage business growth

and consumer spending

Loans get costlier

Increase in money supply

Increase in demand of goods

Increase in GDP growth

Page 11: CRR, SLR & Repo Rate

Let’s get a bit technically correct now. Observe following image :

100 Crores6.75%6 Months

Page 12: CRR, SLR & Repo Rate

What’ll be the consequences (if repo rate is hiked / increased)?

SBI raises its loan interest rate (to keep profit margin same) Businessmen borrow less money from SBI. Businessmen do not start new business or do not expand existing business. Less jobs Less income Less demand Ultimately shopkeeper will bring down

the prices to attract people into buying more things.

*Thus inflation is reduced.Jan'15 March'15 June'15 Sept'15

6.20%6.40%6.60%6.80%7.00%7.20%7.40%7.60%7.80%8.00% 7.75%

7.50%

7.25%

6.75%

Repo Rate

Page 13: CRR, SLR & Repo Rate

Conclusion :

Thus we can see that changes in Monetary policy drastically affects the common people and the nations economy as a whole.

RBI uses the tools of monetary policy periodically to infuse and drain out excess liquidity out of the market.

All the Nationalised Banks and Corporate firms count highly on the RBI rates to garner business from there segments.

In General we can conclude that a Nation’s whole economy count heavily on the monetary policy of it’s Central bank for its prosperity.

Page 14: CRR, SLR & Repo Rate

Thank You