Some of the important aspects relating to CRR and SLR.

1. What is a Repo Rate?

A: Repo rate is the rate at which our banks borrow rupees from RBI. Whenever the
banks have any shortage of funds they can borrow it 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. Present REPO Rate is 6.75.%
2. What is Reverse Repo Rate?
A: This is exact opposite of Repo rate. Reverse Repo rate is the rate at which Reserve
Bank of India (RBI) borrows money from banks. RBI uses this tool when it feels there is
too much money floating in the banking system. Banks are always happy to lend money
to RBI since their money is 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.The rate of Reverse REPO rate is 5.75%
3. What is CRR ?
A: Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep in
Current Account 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. Present CRR is 4.00%
(CRR for Scheduled Banks is As per section 42 of RBI Act )
4. What is SLR Rate?
A: 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. 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. SLR is used to control
inflation and propel growth. Through SLR rate tuning the money supply in the system
can be controlled efficiently. Present SLR is 21.5% for Scheduled Commercial Banks.
(SLR for Scheduled Banks and also Non Scheduled Banks is as per Section 24 of
Banking Regulation Act)

5. What is Bank Rate?

A: Bank rate, also referred to as the discount rate, is the rate of interest which a central
bank charges on the loans and advances that it extends to commercial banks and other
financial intermediaries. Changes in the bank rate are often used by central banks to
control the money supply. .Present Bank rate is 7.75%
Functions of RBI?
The Reserve Bank of India is the central bank of India, was established on April 1, 1935
in accordance with the provisions of the Reserve Bank of India Act, 1934. The Reserve
Bank of India was set up on the recommendations of the Hilton Young Commission.
The commission submitted its report in the year 1926, though the bank was not set up
for nine years. To regulate the issue of Bank Notes and keeping of reserves with a view
to securing monetary stability in India and generally to operate the currency and credit
system of the country to its advantage. Banker to the Government: performs merchant
banking function for the central and the state governments; also acts as their banker.
Banker to banks: maintains banking accounts of all scheduled banks. Supervises and
controls Banks and Financial Institution. Regulates transactions in Foreign Exchange.
RBI Banker to Government.
As per Sec 20 and 21 of the RBI Act Reserve Bank of India is obliged to transact
Banking business and manage the public debts of the Central Government. As per Sec
21A RBI can perform similar functions for State Government.
As per the provision of the Public Debt Act 1944 and also Reserve Bank of India Act ,
RBI manages the public Debt of Central and State Government. Public Debts can be by
way of long term bonds or by way of short term Treasury bills.
Treasury Bills.
Treasury bills represent short term borrowings of Central Government. They are issued
as Promissory Notes with different maturities say 91 days 182 days and 364 days.
Treasury bills are issued by RBI by way of Auction basis. Treasury bills are Negotiable
instrument.
What is monetary policy?
A Monetary policy is the process by which the government, central bank, of a country
controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate
of interest, in order to attain a set of objectives oriented towards the growth and stability
of the economy. This has two objectives, To ensure price stability and to make available

adequate credit to the productive sectors of the economy. This is achieved by regulating
money supply in the market.
Money Supply.
Money supply in the economy is represented by four types of monetary aggregates viz
M0, M1, M2 and M3 .and three types of liquidity aggregates viz L1 L2 and L3 These 7
types of aggregates are computed by RBI as per the recommendations of Dr Y V Reddy
Committee.
The monetary aggregate capture the data only with respect to Banking system. The
Liquidity aggregate taking into consideration the money supply due to Post Office
deposits of Financial Institutions and also Non Banking Financial Institution.
Monetary aggregate
Nature

Components

M0

Monetary base. This is computed by RBI once in a week.

M0 = Currency in circulation + Bankers deposits with RBI + other
deposits with RBI.

M1

Narrow Money.
M1 = Currency with Public + Demand Deposits with Banks +
other deposits with RBI. Demand deposits with Banking system
includes Current Deposits and only demand liability portion of
Savings Bank,.

M2

It can be computed in the following two ways

M2= M1 + Certificate of Deposits issued by Banks + Term
Deposits (Excluding FCNR (B) with the contractual maturity up to
1 year with the Banking systems.)
Or M2 = Currency with Public+ current Deposit with Banking
system.+ SB with Banking system. + Certificate deposits issued
by Banks+ Term Deposits with maturity up to 1 year. (FCNR (B)
excluded) .

M3

Broad Money.
M3 = M2 + Term Deposit (Excluding FCNR (B) deposits) more
than 1 year + call borrowing by Banking system from non
depository financial corporation.

Liquidity
Aggregates.
L1

L1 = M3 + All deposits
Savings Bank.

(Excepting NSCs), with post office

L2

L 1 + Term Deposit /Term Borrowings /Certificate of deposit

issued by Term lending institution/Refinancing institution.

L3

L2 + Public deposit of NBFCs

L1, L2 and L3 are compiled by RBI once in a quarter.

What is Fiscal Policy?

Fiscal policy is the use of government spending and revenue collection to influence the
economy. These policies affect tax rates, interest rates and government spending, in an
effort to control the economy. Fiscal policy is an additional method to determine public
revenue and public expenditure.
Credit Policy and Credit control.
General Credit Control.
General or quantitative Credit control is exercised by changing 1) Bank rate 2) Reserve
Requirements 3) Open Market operations 4) Interest rate Policy. By regulating these
RBI influences the quantum of lendable resources of the commercial Banks and thereby
the total volume of credit which is an important source of money supply. This in turn
helps control inflation.
Bank rate.
This is the rate at which the Central Bank of the country makes advances against
approved securities. Purchases or rediscounts eligible Bills of Exchange and other
commercial paper to provide financial accommodation to Banks or other specified group
of Institutions. Sec 49 of RBI act defines Bank rate as the standard rate at which it is
prepared to buy or discount bills of exchange or other commercial paper eligible for
purchase under this act. Bank rate affect both cost and the availability of credit. The
effectiveness of Bank rate as a credit control measure is very limited in India, as Banks
are now allowed to a great extent. Freedom to change rate of interest as per their
discretion.

Open Market operation.

The buying and selling of securities or other assets like Foreign Exchange, gold by
Central Bank with an objective
Selective Credit control.
While general Credit control is used to regulate the cost and total volume of Credit, the
selective Credit control also known as quantitative control is used to regulate cost and
quantum of credit in selective sectors. RBI is empowered to exercise selective Credit
control by virtue of section 21 and 35A of Banking Regulation Act. Selective Credit
control is exercised by stipulating 1) Minimum margin, for lending against selected
commodities. 2) Ceiling on the level of credit 3) Minimum interest to be charged on
advances against particular commodities.
What is NABARD?
NABARD was established by an act of Parliament on 12 July 1982 to implement the
National Bank for Agriculture and Rural Development Act 1981. It replaced the
Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of
Reserve Bank of India, and Agricultural Refinance and Development Corporation
(ARDC). It is one of the premiere agency to provide credit in rural areas. NABARD is set
up as an apex Development Bank with a mandate for facilitating credit flow for
promotion and development of agriculture, small-scale industries, cottage and village
industries, handicrafts and other rural crafts.
What are non-performing assets?
Non-performing assets, also called non-performing loans, are loans, made by a bank or
finance company, on which repayments or interest payments are not being made on
time. A debt obligation where the borrower has not paid any previously agreed upon
interest and principal repayments to the designated lender for an extended period of
time. The nonperforming asset is therefore not yielding any income to the lender in the
form of principal and interest payments.

Latest CRR , SLR etc as per RBI latest Policy announcement.

- Repo rate

6.75%

- Reverse repo rate

5.75%

- Cash reserve ratio (CRR)

4.00%

- Statutory liquidity ratio (SLR)

Interest on Savings Bank deposit

21.50%
Banks are free to fix the Interest

Interest rate for balance in Current deposit --- Nil.

Bank Rate

7.75%