Wednesday, September 1, 2010

What is Repo rate, Reverse repo rate, CRR, SLR & PLR

Repo Rate:

In simple terms, repo rate is the rate at which the central bank of a country lends money to the banks. In the Indian Banking context repo rate is the rate at which Reserve Bank of India (RBI) lends money to the Indian Banks.

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. It is also a financial & economic tool in the hands of government to control the availability of money supply in the market by altering the repo rate from time to time.

For Ex. The current repo rate is 5.5%
If RBI increases the repo rate by 50 basis points, then the new repo rate will be 6.0%

Reverse Repo Rate:

This is exactly the reverse of the repo rate, i.e. the rate at which the central bank borrows money from the banks. In the Indian banking context its the rate at which the RBI borrows money from the Indian Banks.

The reverse repo rate will/should always be less than repo rate.
The current reverse repo rate is 4.0%

For the current rates you can check the RBI website

CRR (Cash Reserve Ratio) :

Its the ratio of total deposits of all the public sector bank that should be kept with RBI. RBI regulates all these banks & also decides the rates & ratios like Repo Rate, Reverse Repo Rate, Bank Rate, CRR, SLR to control the money supply in the banking sector. 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.

For the current CRR you can check the RBI website

SLR (Statutory Liquidity Ratio) :

Its 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.

For the current SLR you can check the RBI website

PLR (Prime Lending Rate):

PLR is the rate at which the commercial banks charges to their best & most credit-worthy customers though this is not always the case. The rate is determined by the RBI's decision to raise or lower prevailing interest rates for short-term borrowing. Though some banks charge their best customers more and some less than the official prime rate, the rate tends to become standard across the banking industry when a major bank moves its prime up or down. Many consumer loans, such as home loan, car loan, personal loans, are tied to the PLR.

For the current PLR you can check the RBI website

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