RBI policy rates

The RBI on Tuesday cut interest rates for a third time this year on Tuesday. It cut interest rates by 25 basis points for the third time this year. One basis point is one-hundredth of a percentage point. Short-term lending rate (repo) rate now stands reduced to 7.25% from 7.5% earlier. The central bank kept cash reserve ratio unchanged at 4 per cent.

Statutory Liquidity Ratio retained at 21.5%. Let us understand the various instruments or policy rates used by the RBI to maintain the price stability in the economy and regulate bank credit expansion. An open market operation is an instrument of monetary policy which involves buying or selling of government securities from or to the public and banks.

This mechanism influences the reserve position of the banks, yield on government securities and cost of bank credit. Bank Rate is the rate at which central bank (RBI) lends money to other banks or financial institutions. As of 3 February 2015, the bank rate is 8.75%. CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash to be stored with the RBI.

Through this, the RBI can control the amount that banks lend, thereby controlling liquidity in the banking system. SLR stands for Statutory Liquidity Ratio. It is the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. It helps regulate the credit growth. Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks against securities.

Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns. An increase in the reverse repo rate means that the RBI is ready to borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep more and more surplus funds with RBI.