A REPORT ON

BANK RATES

SUBMITTED BY Rudra Sayak Sardar Pooja Kumari Aarti Singh Shresth Kotish Geetashri Pingua

Bank Rate
The interest rate at which a nation's central bank lends money to domestic banks. Often these loans are very short in duration. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity. Lower bank rates can help to expand the economy, when unemployment is high, by lowering the cost of funds for borrowers. Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired. The bank rate can also refer to the interest rate which banks charge customers on loans. RBI is controlling the supply side of the Funds and by changes in CRR and SLR, Bank control the supply side of the money.so when RBI increase these ratio then available funds with the banks will go down and as demand remain the same then people will have to pay more as interest and interest rate will go up.On the reverse if RBI reduce these rates ,then amount available with bank for lending will be increased and they have to reduce rates to lend more.In these situation bank also reduce the rate of short term deposit from public as they have surplus money already to lend.so these rates have double impact the first direct effect is ,bank reduce rate of lending so more money is available with people and second is interest on Deposit will be reduced so more money will be available with the people. 7.50% (w.e.f. Repo Rate under LAF 19/03/2013) Decreased from 7.75% which was continuing since 29/01/2013

Reverse Repo

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The banks use this tool when they feel that they are

stuck with excess funds and are not able to invest anywhere for reasonable returns. 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. An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.

For example in the case of reverse repo, the RBI would be the one, who will be selling the security to the commercial bank and telling it.if you give me Rs. 100 for 3 months today, Ill pay you Rs. 3 as interest on it after 3 months and you give me back this security. So it is actually a repo from RBIs perspective but a reverse repo from the commercial banks perspective. For example in the case of reverse repo, the RBI would be the one, who will be selling the security to the commercial bank and telling it.if you give me Rs. 100 for 3 months today, Ill pay you Rs. 3 as interest on it after 3 months and you give me back this security. So it is actually a repo from RBIs perspective but a reverse repo from the commercial banks perspective.
7.6

Rate

7.4 7.2 7 6.8 6.6 6.4 6.2 6 26-Jul-11 25-Oct-11 07-Apr-12 29-Jan-13 19-Mar-13

Effect of Bank Rate on Economy The change in the discount rate shows direction of the central banks policy. An increase in bank rate reveals that the central bank is moving towards higher credit and higher interest rate. The decease in the interest rate is taken as a forecast of business recession.

Central Bank raises the bank rate > Money market interest rate increases > Decline in borrowing by business people > Fall in out put employment and incomes Central bank decreases the bank rate > Money market interest rate decreases > Increase in employment and income .

Cash Reserve Ratio & Statutory Liquid Ratio

Cash reserve Ratio (CRR) is the amount of Cash (liquid cash like gold) that the banks have to keep with RBI. This Ratio is basically to secure solvency of the bank and to drain out the excessive money from the banks. If RBI decides to increase the percent of this, the available amount with the banks comes down and if RBI reduces the CRR then available amount with Banks increased and they are able to lend more. Present rate is 4% announced SLR((Statutory Liquidity Ratio) is 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. Generally this mandatory ration is complied by investing in Govt bonds. Present rate of SLR is 23 %.But Banks average is 27.5 %, the reason behind it is that in deficit Budgeting,Govt landing is more so they borrow money from banks by selling their bonds to banks. So banks have invested more than required percentage and use these excess bonds as collateral security ( over and above SLR )to avail short term Funds from the RBI at Repo rate. Impact on Inflation and Interest rates: As we all have read the famous line "if all thing remain the same ......".so In all my below paragraphs please note that there are many assumption in fixing the relation between this ratio and interest rates . SLR and Cash reserve ratio is maintained for bank solvency and higher ratio of SLR and CRR makes bank relatively safe as higher ratio means they have more of their funds deposited in liquid securities and can fulfil the demand on redemption of deposit from the Bank. Lets take an example: suppose a Bank has taken a deposit of 100 from public and CRR is 4 and SLR is 23 then available funds to lend from deposits with the bank will be 100-4-23=73 so there is direct relation between CRR ,SLR and Funds available with bank to lend to public out of deposit received from public .

Impact on Interest rates of this ratios: Now take point what will be the impact on Interest rates of this ratios: Interest rate are fixed on the Demand supply situation of the amount available with person who want to lend and person who want to borrow and interest rate is fixed on demand supply of the funds if demand is more and supply is less then interest rate rises up and if demand is less and supply is excessive then interest rate comes down .this relation is based on many assumption as said above. So RBI is controlling the supply side of the Funds and by changes in CRR and SLR, Bank control the supply side of the money. So when RBI increase these ratio then available funds with the banks will go down and as demand remain the same then people will have to pay more as interest and interest rate will go up. On the reverse if RBI reduces these rates, then amount available with bank for lending will be increased and they have to reduce rates to lend more. In this situation bank also reduce the rate of short term deposit from public as they have surplus money already to lend. So these rates have double impact the first direct effect is ,bank reduce rate of lending so more money is available with people and second is interest on Deposit will be reduced so more money will be available with the people. But other side of interest rate i.e. demand/off take of loan is also important to set the interest rate .This may be some time region wise and seasonal or other factor also effect the decision of Interest rate. Impact on inflation As from the above Para we have understood that how these ratio reduce or increase the money supply in the system and we know if more person is demanding few goods then price of goods tends to increase and its called inflation so when RBI reduce these ratios then money supply in market increases and inflation is rises further but in present case this is not the correct and right relation. The Increase in CRR will squeeze 36000 crore from market, so less money will chase few things means less demand so it will reduce Inflation. At the time of depression the reduction of this ratio is to maintain liquidity without disturbing inflation much. While marked is falling and each and every commodity rate going downwards. In these situations after increasing of money supply inflation rate does not goes up as the demand is slow and reduction in commodity prices will nullify the impact of increase in money supply and have less inflationary effects.

But sometimes in few cases Inflation is due to supply side ,like in case of pulses and sugar the demand is somewhat the same but production has been reduced and rate has been doubled .In these types of cases Ever Increase in CRR will not have much impact as the problem is from supply side .

CRR
7 6 5 4 3 2 1 0

CRR

REPO & REVERSE REPO

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate

Repo Rate under LAF

7.50% (w.e.f. 19/03/2013)

Decreased from 7.75% which was continuing since 29/01/2013

RBI tells the bankOK I will pay Rs. 100 for this security now but when you buy it back from me, please pay me Rs. 103. The extra Rs. 3 that RBI charges constitutes the repo rate (translates into 12% pa for this example). Hence, repos are a form of collaterlized or secured borrowings in which the borrower must place a collateral with the lender (in this case RBI). If the borrower does not manage to buy back the security, the lender can redeem its collateral value. Generally, repos are used for managing domestic liquidity in the economy.

Repo
10 8 6 4 2 0

Rep rate

01/09/2010

01/09/2011

01/03/2010

01/06/2010

01/12/2010

01/03/2011

01/06/2011

01/12/2011

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.

Reverse Repo Rate under 6.50% (w.e.f. LAF * 19/03/2013)

Decreased from 6.75% which was continuing since 29/01/2013

For example in the case of reverse repo, the RBI would be the one, who will be selling the security to the commercial bank and telling it.if you give me Rs. 100 for 3 months today, Ill pay you Rs. 3 as interest on it after 3 months and you give me back this security. So it is actually a repo from RBIs perspective but a reverse repo from the commercial banks perspective.

01/03/2012

 Banks earn profit by borrowing at a lower rate of interest from the central bank, and lending the same amount at a higher rate to the customers. If the repo rate or the bank rate is increased, bank has to pay more interest to the central bank. So in order to make profit, banks in turn increase their interest rate at which they take deposit from the customer and lend money to the customer. So the demand for loan decreases, and people start putting more and more money in bank accounts to earn higher rate of interest. This helps in controlling inflation. An increase in Reverse repo rate causes the banks to transfer more funds to the central bank, because banks earn attractive interest rates and also their money is in safe hands. This results in the money being drawn out of the banking system, thus banks are left with lesser funds.