The Reserve Bank of India will review the Monetary Policy today. Here is a ready reckoner that simplifies the policy jargon for you. Also check out expectations from the policy.


Monetary Policy

Monetary Policy includes measures undertaken by a central bank in order to control the supply and availability of money. The bank does so by increasing or decreasing the interest rates.

Statutory Liquidity Ratio (SLR)

The SLR is the amount a commercial bank needs to maintain in the form of cash or gold or government-approved securities (bonds) before providing credit to its customers. The SLR rate is determined and maintained by the RBI from time to time to control the expansion of bank credit. The Reserve Bank of India (RBI) increases or decreases bank credit expansion by changing the SLR rates. It enables the RBI to ensure the solvency of a commercial bank. Generally, banks are compelled to maintain the SLR by investing in Government bonds.

Cash Reserve Ratio (CRR)

It is a portion of deposits which banks have to keep with the RBI. Indian banks are required to hold a certain proportion of their deposits as cash. In reality they don’t hold these as cash with themselves, but with Reserve Bank of India (RBI), which is as good as holding cash. For instance, if the CRR is Rs 10, when a bank’s deposits increase by Rs100, it will keep Rs 10 with the RBI and lend Rs 90.

The higher this ratio, the lower is the amount that banks can lend out. Bank’s profitability suffers when CRR is increased as the lendable funds reduces. This makes the CRR an instrument through which the central bank controls the amount that the banks can lend. CRR serves two purposes. It ensures a portion of bank deposits are totally risk-free and, second, it enables RBI to control liquidity in the system and, thereby, inflation. RBI increases CRR Rate to drain out the excessive money from the banks.

Repo rate

On facing a shortage of funds, banks can fill the gaps between demand and supply of money, with help from the RBI. Repo rate is the rate at which commercial banks borrow rupees from RBI, as a short-term measure.  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.

Reverse repo rate

Reverse repo rate is the rate at which RBI borrows funds from banks. Based on this rate, the RBI pays banks for depositing funds.




Also read: Monetary Policy expectations