Bank Rate:
Bank Rate refers to the rate at which RBI provides loan to the commercial banks.
During times of inflation, the central bank (RBI) increases the bank rate to counter inflation. The cost to borrow funds from RBI, for commercial banks increases. As a result, disposable income decreases and it becomes difficult for consumers to borrow money from commercial banks to purchase home, car etc.
During times of deflation, the central bank (RBI) decreases the bank rate to overcome the problem of deflation. The cost to borrow funds from the RBI, for commercial banks decreases. As a result, disposable income increases and it becomes easier for consumers to borrow money from commercial banks to purchase home, car etc.
Cash Reserve Ratio (CRR):
The Cash Reserve Ratio (CRR) is the percentage of a commercial bank's total deposits that must be held as cash reserves with the central bank (Reserve Bank of India) and cannot be lent out.
The central bank can adjust the CRR, influencing the amount of money banks can lend to the public and businesses.
A higher CRR reduces money available for lending, tightening liquidity and curbing inflation, while a lower CRR increases lending capacity, injecting liquidity to boost economic growth.
Statutory Liquidity Ratio (SLR):
Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities.
- Cash - Physical currency held by the bank.
- Gold - Physical gold held in reserves.
- Government Securities - Bonds and other securities issued by the government.
- Other Approved Securities - Securities specifically approved by the central bank.
The RBI uses SLR to manage the amount of credit banks can extend to the public.
A higher SLR reduces lending capacity, and a lower SLR increases it.
