Repo rate
Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks or financial institutions against government securities. When the RBI reduces the repo rate, it increases the money supply in the market, thereby accelerating economic growth. Conversely, a high repo rate can dampen economic expansion.
Reverse repo rate
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Standing deposit facility rate
The standing deposit facility (SDF) rate is a liquidity window through which the RBI offers banks an option to park their excess liquidity with it. SDF works as an overnight facility, which means that banks can deposit their excess funds with the RBI for one day and get them back the next day. It is different from the reverse repo facility in that it does not require banks to provide collateral while parking funds.
Marginal standing facility rate
Marginal standing facility or MSF is the rate at which banks borrow from the RBI against approved government securities overnight. Introduced in 2011, this mechanism aids banks in managing their unexpected financial needs and maintaining liquidity.
A higher MFS rate implies that banks will need to borrow at an elevated rate, potentially causing a trickle-down effect on retail loans like home and car loans. On the other hand, slashing MSF rates produces the opposite effect.
Liquidity adjustment facility
A liquidity adjustment facility (LAF) is a monetary policy tool of the RBI, which enables banks to manage their short-term liquidity needs by borrowing money through ‘repurchase agreements’ (reposals) or deposit money with the RBI using ‘reverse repo contracts’ and earn interest. It influences key monetary variables such as interest rates.
Bank rate
The bank rate is also known as the discount rate. It is the rate at which commercial banks and lending institutions borrow money from the RBI. Bank rate depends on the prevailing inflation rate of a country. The RBI determines the bank rate based on inflation. When the inflation rate exceeds the acceptable rate, it increases the bank rate to control inflation.
Cash reserve ratio
The commercial banks have to hold a certain minimum amount of deposit as reserves with the central bank. The percentage of cash required to be kept in reserves as against the bank’s total deposits, is called the Cash Reserve Ratio (CRR). The cash reserve is either stored in the bank’s vault or sent to the RBI. Banks can’t lend the CRR money to corporates or individual borrowers. Banks can’t use that money for investment purposes as well. And banks don’t earn any interest on that money.
Statutory liquidity ratio
Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. These are not reserved with the RBI, but with banks themselves. The SLR is fixed by the RBI. CRR and SLR have been the traditional tools of the central bank’s monetary policy to control credit growth, flow of liquidity and inflation in the economy.
Open market operations
Open Market Operations (OMOs) refer to the buying and selling of bonds issued by the government in the open market. OMO is one of the quantitative tools that RBI uses to smoothen the liquidity conditions throughout the year and minimise its impact on the interest rate and inflation rate levels.
First Published: Apr 05 2024 | 9:10 AM IST