Monday, May 27, 2013

Role of RBI, Repo and Reverse Repo rate, Bank rate

RBI acts as a banker to the government participating in open market operations, maintaining price stability and ensure adequate flow of credit to productive sectors.

Open Market operations (OMO)
RBI sells or buys government securities in open market transaction depending upon whether it wants to increase liquidity or reduce it.

Reserve Requirements (CRR and SLR)
CRR or cash reserve ratio refers to a portion of deposits which banks have to keep with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk free and secondly it enables RBI to control liquidity in the system and thereby inflation. To control inflation RBI increases CRR and on other hand if it wants growth then RBI reduces it.

SLR is Statutory Liquidity Ration refers to the amount that all banks requires maintaining in cash, gold or approved securities with RBI. This helps RBI to control liquidity in the market.

Repo Rate
It is the interest rate which RBI charges to banks for collateralized short term loan.

Reverse Repo Rate
Reverse Repo is the rate which RBI pays to banks. When banks have surplus liquidity and there are not enough borrowings from banks by consumers banks park money with RBI and earn some interest called reverse repo rate.

Bank Rate
It is the interest rate at which banks, FIs and other approved entities in the interbank market can get financial accommodation from RBI.

Reference
www.rbi.org.in/home.aspx

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