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Latest Repo & Reverse Repo Rates hiked in 27 th July,2011:
1) Repo rate up by 0.50 bps from to 8 %
2) Reverse Repo Rate up by 0.50 bps to 7 %
3) Cash Reserve Ratio unchanged
4) GDP forecast for FY 20111 at 8.5% with upward bias
Let us simplify the whole subject for common readers.
Inflation means costly consumer goods & low rate of returns on investments, inflation may be healthy to certain extent for growing economy & when inflation goes beyond control, RBI takes measures to control inflation.
1) Repo Rate :
Banks need funds for business & whenever banks are in shortage of funds, RBI lends them money with some charges which is known as REPO Rate.
Rise in Repo rate will make borrowing costlier for banks
Repo rate is the rate at which liquidity is injected in Banks.
2) Reverse Repo Rate :
Banks may have excess of funds & RBI absorbs the extra funds from banks, the rate RBI pays to Banks is Reverse Repo rate.
Rise in reverse repo rate will help banks to get better returns.
Reverse Repo Rate is the rate at which RBI absorbs liquidity from Banks.
3) Cash Reserve ratio ( CRR ) :
It is mandatory for Banks to hold certain portion of deposits in the form of cash ( Deposit with RBI/ currency chest ).
CRR range is 3% to 20% of the total Demand & liabailities.CRR ratio is 6 % & is unchanged in the current policy.
Imagine total deposit of the bank Rs.100
CRR if 6 %, Rs.6 , banks will have to deposit Rs.6 with RBI & manage with Rs.94, if CRR goes up banks will have lower liquidity.
4) Statutory Liquidity Ratio ( SLR ) :
It is mandatory for banks to hold statutory liquidity at end of every business day ( Cash, Gold etc ) to meet the demand & liabilities.
Prevailing SLR is 24 % now & maximum limit is 40%.
1) Bank Rate 6%
2) CRR 6%
3) SLR 24 %
4) Repo Rate 8%
5) Reverse Repo Rate 7%
bps is basis points or a value of % , you can say 1basis point = 0.1 %