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Banking Rates

Learn about inflation, deflation, CRR, SLR, and monetary tools in banking from Dr. Deepak Sahni at SGRRITS, Dehradun. Gain insights into economic indicators that impact the Indian economy.

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Banking Rates

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  1. Banking Rates Dr. Deepak Sahni Principal & Professor SGRRITS E.mail: deepak.sahani@sgrrits.org Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  2. Inflation What is Inflation? Inflation is defined as an increase in the price of bunch of Goods and services that projects the Indian economy. An increase in inflation figures occurs when there is an increase in the average level of prices in Goods and services. Inflation happens when there are less Goods and more buyers, this will result in increase in the price of Goods, since there is more demand and less supply of the goods. Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  3. Deflation Deflation is the continuous decrease in prices of goods and services. Deflation occurs when the inflation rate becomes negative (below zero) and stays there for a longer period... Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  4. What are the effects of Deflation During deflation the price of goods and services is falling and consumers will tend to delay their purchases until prices fall further. This will cause for a lower production, lower wages and demand which will lead to further decrease in prices. This is known as deflationary spiral. Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  5. Cash Reserve Ratio (CRR) The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and has come into force with its gazette notification. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate.  [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and 20 per cent of total of their demand and time liabilities]. Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  6. Cash reserve Ratio cont…. CRR Rate in India Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. CRR: 4% Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  7. What is CRR (For Non Bankers) What is CRR (For Non Bankers)  : CRR means Cash Reserve Ratio.  Banks in India are required to hold a certain proportion of their deposits in the form of  cash.  However, actually Banks  don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as  equivlanet to holding cash with themselves.. This minimum ratio (that is the part of the total deposits  to be held as cash) is stipulated by the RBI and is known as the CRR or  Cash Reserve Ratio.  Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold additional Rs 9 with  RBI and Bank will be able to use only Rs 91 for investments and lending / credit purpose. Therefore,  higher the  ratio (i.e. CRR), the lower is the amount that banks will be able to  use for lending and investment.  Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  8. Repo rate Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. Repo rate: 6.25% Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  9. Reverse Repo rate Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system. Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man. Reverse Repo : 5.75% Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  10. Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks. Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  11. What is SLR? Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 20.75%. RBI is empowered to increase this ratio up to 40%.  An increase in SLR  also restrict the bank’s leverage position to pump more money into the economy. Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  12. Statutory Liquidity Ratio cont… SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit. Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  13. How is SLR determined? SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. . Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  14. What is the Need of SLR? With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds.. Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

  15. What is Bank rate? What is Bank rate?   Bank Rate is the rate at which central bank of the country  (in India it is RBI)  allows finance to commercial banks. Bank Rate is a tool, which central bank  uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate. Thus any revision in the Bank rate indicates more or less interest on your deposits and also an increase or decrease in your EMI. Bank Rate kept unchanged at 6.75%. Dr. Deepak Sahni, Principal, Dept. of Management, SGRRITS, Dehradun

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