Impact of Repo Rate, CRR, SLR

on
Indian Economy
 Agenda :

1. What is Monetary Policy ?

2. Cash Reserve Ratio (CRR)

 How does CRR affect economy ?

3. Statutary Liquidity Ratio (SLR)

 How does SLR affect economy ?

4. Repo Rate or Repurchase Rate

 What’ll be the consequences of Repo Rate ?

5. Conclusion
 What is Monetary Policy?

 Policy made by the central bank (RBI).

 To control money supply in the economy. (and thereby fight both inflation and deflation).
 RBI implements monetary policy using certain tools.

Quantitative Bank Rate, CRR, SLR,

Repo Rate, Reverse
Tools Repo Rate, OMO

Monetary Policy
Tools
Qualitative Direct Action, Moral
Persuasion,
Tools
Legislation, Publicity
 Cash Reserve Ratio (CRR)

 Scheduled Commercial Banks(SCBs) in India are required to hold a certain proportion of their Demand and Time
Liabilities with RBI as per Section 42(1) of the Reserve Bank of India Act, 1934.

 This minimum ratio is stipulated by RBI and is known as the Cash Reserve Ratio (CRR).

 Current CRR Rate is 4%.

 Drain out excessive liquidity from the banks

 Release funds needed for the growth of the economy from time to time

 Secure solvency of the banks

 How does CRR affect economy ?

When the CRR is -

Hiked Lowered

Banks have less money for lending Banks have more money for lending

To maintain profit margin, banks Lower interest rate

increase lending rate

Customers borrow less and eventually Cheap loan

spend less

Demands for goods and services thus More people take more loan
comes down

Slow down in economy Boost in economy

 Statutary Liquidity Ratio (SLR)

 It is the proportion of the total deposits which commercial banks are required to maintain with the Central
bank in the form of liquid assets like cash, gold, Govt. Bonds and securities.

 SLR = {Liquid assets/(Demand + Time Libilities)} x 100

 RBI is empowered to increase this ratio upto 40%

SLR
 Current SLR rate is 21.5% 26% 25%
25% 24% 24%
24% 23%
23% 22.50%
22%
22% 21.50%
21%
20%
19%

Nov-08 Oct-09 Dec-10 Aug-12 Jun-14 Aug-14 Feb-15

 To restrict expansion of the bank credit

 To increase bank’s investment in Govt. Securities

 To ensure solvency of the banks

 How does SLR affect economy?

When the SLR is -

Hiked Lowered

Cash reserves of commercial banks Cash reserves of commercial banks

decrease increase

Rate of interest increase Rate of interest decrease

Price of credit increase Price of credit decrease

Demand for credit decrease Demand for credit increase

Credit contracts in economy Credit expands in economy

 Suppose economy is showing inflationary trend:

 How can RBI stop it using Reserve ratio as a tool?

 In this case, RBI should RAISE the reserve ratios.

Observe:
Originally:
Example Right now: (RBI raises CRR to 15% and SLR
(CRR – 4% & SLR – 21.5%) to 40%)

People deposited total this much

money in ABC Bank (NDTL) 100 cr. 100 cr.

CRR [ has to keep this much cash

aside for reserve] - 4 cr. - 15 cr.

SLR [ABC Bank has to invest this

much money in RBI approved - 21.5 cr. - 40 cr.
securities]

Money left with ABC Bank 100 – 4 – 21.5 = 74.5 Cores. 100 – 15 – 40 = 45 Cores.
When Raghuram Rajan has raised reserve ratio, money with ABC Bank is reduced from 74.5 crores to just 45
crores.

Consequences:

 ABC Bank raises its loan interest rate

 Businessmen borrow less money from ABC Bank

 Businessmen donot start new business or Donot expand existing business

 Result = Less jobs

 Result = Less income (Because of above reasons)

 Result = Less demand of goods and services (because less income)

 Ultimately shopkeeper will bring down the prices to attract people into buying more things

*Thus inflation is reduced.

 Repo Rate or Repurchase Rate

 Repo Rate or Repurchase Rate is the rate at which banks borrow money from the Central Bank (RBI).
 It is for short period.
 The banks sell their securities (Financial Assets) with an agreement to repurchase it at future date at
predetermined price.
 Current Repo Rate is 6.75%.

What if the Repo Rate is –

Hiked Lowered

 Decrease in money supply

 Increase in money supply
 Discourage business growth
 Increase in demand of goods
and consumer spending

 Loans get costlier  Increase in GDP growth

Let’s get a bit technically correct now.
Observe following image :

100 Crores
6.75%
6 Months
What’ll be the consequences (if repo rate is hiked / increased)?

 SBI raises its loan interest rate (to keep profit margin same)
 Businessmen borrow less money from SBI.
 Businessmen do not start new business or do not expand existing business.
 Less jobs
 Less income
 Less demand Repo Rate
8.00%
 Ultimately shopkeeper will bring down 7.80%
7.75%

the prices to attract people into buying more things. 7.60% 7.50%
7.40% 7.25%
7.20%
7.00%
6.75%
6.80%
6.60%
*Thus inflation is reduced. 6.40%
6.20%
Jan'15 March'15 June'15 Sept'15
 Conclusion :

 Thus we can see that changes in Monetary policy drastically affects the common
people and the nations economy as a whole.

 RBI uses the tools of monetary policy periodically to infuse and drain out excess
liquidity out of the market.

 All the Nationalised Banks and Corporate firms count highly on the RBI rates to
garner business from there segments.

 In General we can conclude that a Nation’s whole economy count heavily on the
monetary policy of it’s Central bank for its prosperity.
Thank You