Scribd Logo
Upload

Welcome to Scribd!

  • 12 views

    Cash Reserve Ratio (CRR) - Repo Rate & Reverse Repo Rate (UPSC Notes)

    Uploaded by

    Deepanshu kumar

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Cash Reserve Ratio (CRR) - Repo Rate & Reverse Repo Rate (UPSC Notes)

    Uploaded by

    Deepanshu kumar
    12 views2 pages

    Original Title

    ok

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    12 views2 pages

    Cash Reserve Ratio (CRR) - Repo Rate & Reverse Repo Rate (UPSC Notes)

    Uploaded by

    Deepanshu kumar

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 2

    Cash Reserve Ratio (CRR)- Repo Rate & Reverse

    Repo Rate (UPSC Notes)


    CRR is an important tool of the Monetary Policy. Monetary Policy is the process of regulating the supply of
    money in an economy by the monetary authority of the country. A specific CRR is provided to each commercial
    bank in India by the RBI. The Reserve Bank of India is authorised to make monetary policy under the Reserve
    Bank of India Act, 1934 and can set the cash reserve ratio between 3% and 15%.

    5 Important Rates (Updated)


    The below-given table shares the updated details of 5 important rates fixed by the Reserve Bank of India
    (RBI) (as of 4 May, 2022).
    th

    Reverse Repo Rate 3.35%

    Repo Rate 4.40

    Cash Reserve Ratio (CRR) 4%

    Bank Rate 4.65%

    Statutory Liquidity Ratio (SLR) 18.00%

    What is a Cash Reserve Ratio?


    Cash Reserve Ratio (CRR) is a specific part of the total deposit that is held as a reserve by the commercial
    banks and is mandated by the Reserve Bank of India (RBI). This specific amount is held as a reserve in the
    form of cash or cash equivalent which is stored in the bank’s vault or is sent to the RBI. CRR ensures that
    the banks do not run out of money.
    Cash Reserve Ratio in India is decided by the Monetary Policy Committee (MPC) under the periodic
    Monetary and Credit Policy. If the CRR is low, the liquidity with the bank increases, which in turn goes into
    investment and lending and vice-versa. Higher CRR creates a negative impact on the economy and also
    lowers the availability of loanable funds. As a result, it slows down the investment and reduces the supply of
    money in the economy.

    Significance of CRR
    CRR is an important tool of the Monetary Policy which provides the following benefits:
    • CRR regulates the money supply and the level of inflation in the country.
    • CRR ensures the security of the reserved amount as the specific amount of the bank’s deposit is
    stored with the Reserve Bank of India which can be readily available as per the need of the
    customers.
    • CRR also has a major role to play during high inflation. During high inflation, the Reserve Bank of
    India increases the CRR rate to reduce the amount of money that is available with the banks. This
    reduces the excess flow of money in the economy.
    • During the need of funds, the government can lower the rate of the CRR to help the banks in
    providing loans to various businesses and industries for investment. A low rate of CRR also
    increases the growth rate of the economy.

    Repo Rate and Reverse Repo Rate


    Repo rate can be defined as an amount of interest that is charged by the Reserve Bank of India while
    lending funds to the commercial banks. The word ‘Repo’ technically stands for ‘Repurchasing Option’ or
    ‘Repurchase Agreement’. Both the parties are required to sign an agreement of repurchasing which will
    state the repurchasing of the securities on a specific date at a predetermined price. The repo rate in India is
    controlled by the Reserve Bank of India.
    Any changes in the repo rates can directly impact the economy. A decrease in the repo rates helps in
    improving the growth and economic development of the country. A decline in the repo rate can lead to the
    banks bringing down their lending rate which is beneficial for retail loan borrowers.
    Reverse Repo Rate
    The reverse repo rate is the rate of interest that is provided by the Reserve bank of India while borrowing
    money from the commercial banks. In other words, we can say that the reverse repo is the rate charged by
    the commercial banks in India to park their excess money with RBI for a short-term period. The current
    reverse repo rate in India as of March 2021 is 3.35%. Reverse repo rate is an important instrument of the
    monetary policy which control the money supply in the country.
    Components of Repo Transaction
    Some of the major components of the Repo Transaction which is important for the agreement of the RBI for
    executing any transaction with the banks are as follows:
    • Preventing economy squeezes: The Reserve Bank of India can increase or decrease the repo rate
    depending on the inflation and thus, it can control the economy of the country.
    • Short-Term Borrowing: RBI can lend money to the commercial banks for a short period of time
    provided that the banks must buy back their deposited securities at a predetermined price.
    • Collaterals & Securities: Collaterals in the form of gold and bonds are also accepted by the RBI.
    • Liquidity: The funds borrowed by the banks from the RBI are kept as a precautionary measure to
    maintain liquidity.

    CRR, Repo rates and Reverse Repo Rates are important tools of Monetary Policy. Candidates preparing for
    UPSC are also advised to keep a track on the latest current affairs related to several economic
    developments in the country.

    You might also like