Different Rates Related to Banking(repo rate,reverse repo,bank rate,MSF,SLR and CRR)
Bank Rate
In simple words Bank rate is the rate at which central bank(RBI) lends money to commercial banks for meeting shortfall for a long period without selling or buying any security.
Repo rate
Rate at which central bank(RBI) lends money to commercial bank for short term liquidity needs.This involves bank selling securities to RBI to borrow the money with an agreement to repurchase (repurchase agreement) them at a later date and at a predetermined price.
MSF(Marginal Standing Facility Rate)
Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities. MSF is a very short term borrowing scheme for scheduled commercial banks.This measure has been introduced by RBI in the year 2011-2012 to regulate short-term asset liability mismatches more effectively.MSF generally kept at 1% more than the Repo Rate by the RBI(India).
Are you confused with Bank rate, repo rate and MSF. Lets take a look at the difference between Bank rate, Repo rate and MSF
Rate | Duration | Using a Collateral (securities) |
Bank Rate | Long term | No |
Repo | Short term | Yes |
MSF | Overnight | Yes |
Reverse Repo Rate
This is exact opposite of Repo rate.Reverse repo rate is the rate at which Central bank(RBI) borrows money from commercial banks by selling securities.This involves bank selling securities to RBI to borrow the money with an agreement to repurchase(repurchase agreement) them at a later date and at a predetermined price.
CRR Rate
Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves in the form of cash with the central bank(RBI). CRR serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system.
SLR(Statutory Liquidity Ratio)
SLR is the percentage of total net demand and time liabilities(NDTL) that commercial banks need to maintain in the form of gold, government approved securities before providing credit to the customers.
Net demand and Time Liability(NDTL)
Demand Liabilities
Demand Liabilities of a bank are liabilities which are payable on demand. These include Saving account deposits,Currents account deposits,Matured fixed deposits,Demand Drafts (DDs) etc..
Time Liabilities
Time Liabilities are the liabilities a commercial bank is liable to pay to the customers after a specific time period.This includes fixed deposits, cash certificates, cumulative and recurring deposits ect..
NDTL=(Demand Liablities+Time Liabilities)- Interbanks Deposits.
How RBI Regulates Liquidity using different Rates(Liquidity Adjustment Facility)
Liquidity adjustment facility (LAF) is the monetary policy tool by which RBI controls the liquidity in money market.LAF allows banks to borrow money through repurchase agreements.Two components of LAF are repo rate and reverse repo rate.While repo injects liquidity into the system, the Reverse repo absorbs the liquidity from the system.To inject more money in to the market RBI lowers Repo rate and to absorb money from money market RBI increases the Repo rate.Reverse repo rate is usually 1% less than repo rate.CRR and SLR are also used by RBI for liquidity control.As CRR and SLR goes high,funds available with banks for providing credit to customers lower and thus reduces money flow which in turn reduces liquidity.
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