CRR, SLR & Repo Rate

Effect of credit control tools of monetary policy of RBI

1. Impact of Repo R ate , CRR, SLR on Indian Economy

2. Agenda : What is Monetary Policy ? Cash Reserve Ratio (CRR) How does CRR affect economy ? Statutary Liquidity Ratio (SLR) How does SLR affect economy ? Repo Rate or Repurchase Rate What’ll be the consequences of Repo Rate ? Conclusion

3. 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.

4. 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 :

5. How does CRR affect economy ? When the CRR is - Hiked Lowered

6. 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 :

7. How does SLR affect economy? When the SLR is - Hiked Lowered

8. 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.

9. 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:

10. 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 – Lowered Hiked 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

11. Let’s get a bit technically correct now. Observe following image : 100 Crores 6.75% 6 Months

12. 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.

13. 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 m onetary policy of it’s Central bank for its prosperity.

14. Thank You