Bird’s eye view on the Key Bank Ratios

Key Ratio announcements by Reserve Bank of India (RBI) in its Third Bi-monthly Monetary Policy Statement, 2015-16 issued on 4th August, 2015 by Governor, Dr. Raghuram Rajan

  1. Repo rate under the liquidity adjustment facility (LAF) unchanged at 7.25%. Consequently, Reverse Repo Rate is unchanged at 6.25%.
  2. Cash Reserve Ratio (CRR) of scheduled banks unchanged at 4.00% of Net Demand and Time Liability (NDTL);

Brief Snippets on the Key Bank Ratios

Cash Reserve Ratio (CRR)
It is the specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is an important tool to regulate the monetary supply in the economy. The amount specified as CRR is held in cash and cash equivalents by the banks or parked with the Reserve Bank of India. This is to ensure the bank’s liquidity and further ensure that banks do not run out of cash to meet the payment demands of their customers.

Statutory Liquidity Ratio (SLR)
It is the minimum percentage of deposits that the bank has to maintain in the following form:

  1. in Cash
  2. Gold valued at a price not exceeding the current market price,
  3. Investment in the instruments referred to as “Statutory Liquidity Ratio (SLR) securities” including Treasury Bills, dated securities of the Government of India issued from time to time under the market borrowing programme and the Market Stabilization Scheme, State Development Loans (SDLs) of the State Governments and any other instrument as may be notified by the Reserve Bank of India.

It currently stands at 21.50% as at 4th August, 2015.

Repo Rate
It is the rate at which the RBI lends shot-term money to the banks against securities. When the repo rate increases, borrowing from RBI becomes more expensive. Similarly, if RBI is willing to make it borrowing money cheaper for banks, it reduces the repo rate.

Reverse Repo Rate
It is the rate at which banks park their short-term excess liquidity with the RBI. An increase in the reverse repo rate means that the RBI is ready to borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep more and more surplus funds with RBI. Accordingly, Reverse Repo is increased to pull out the excess liquidity from the market, as the banks are encouraged to keep the excess money with RBI due to higher rates.

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