1

DAILY
CLASS NOTES
Indian Economy

Lecture – 06
RBI (Part 2)
 2

RBI (Part 2)
Functions of RBI:
 Lender of Last Resort: RBI is not only a banker to the banks but also a lender of last resort. That means, in
times of crisis, the Scheduled Commercial Banks approach the RBI to get financial assistance. As RBI
is the lender of last resort, it gives opportunity, enabling itself to exercise control over the banking system of
the country.
 RBI is the controller of credits created by banks. It controls the credit/loans through two methods which are
known as credit controllers:
 Quantitative Method
 Qualitative Method
Quantitative Methods:
1. Repo and Reverse Repo Ratio
2. Cash Reserve Ratio (CRR)
3. Statutory Liquidity Ratio (SLR)
4. Marginal Standing Facility (MSF)
5. Standing Deposit Facility
6. Bank rate
Qualitative methods:
1. Rationing of credit
2. Regulating loans for consumption purposes
3. Variation in margin requirements
4. Moral suasion
5. Direct action
Refinancing:
 Refinancing occurs in India when government securities are further utilised by commercial banks to get a
loan from RBI.
Repo Rate:
 Repo rate is the rate at which banks are availing refinancing facilities from RBI.
 Currently the repo rate in India is 6.5% per annum.
 Full form of Repo is 'Repurchase Option' or 'Repurchase Agreement'.
Cash Reserve Ratio (CRR):
 CRR is the average daily balance that a bank is required to maintain with the RBI as a percentage of at
demand and time liabilities (total deposits of the bank). As on the last Friday of the second preceding
fortnight that reserve bank may modify from time to time.
 The current CRR is 4.5%.
 This ratio is defined under section 42 of RBI act 1934 and there is no upper limit and lower limit for CRR.
 In times of inflation RBI increases the CRR and in the time of slowdown or recession, RBI decreases the
CRR.
 When RBI increases CRR, it is known as tight monetary policy and when RBI decreases, it is known as
expansionary or liberal monetary policy.
 3

Statutory Liquidity Ratio (SLR):

 Every bank shall maintain in India of its net demand and time liabilities (NDTL)/ total deposits of the bank
in the form of cash, gold, and or government securities as in the last Friday of the second preceding
fortnight, as the RBI may decide from time to time.
 Currently the SLR is 18% in India.
 This ratio is given under section 24 of the banking regulation act 1949.
 There is an upper limit of 40% for SLR and there is no lower limit.
Standing Deposit Facility (SDF):
 It is the rate at which the RBI accepts uncollateralized deposits from the banks.
 SDF is implemented by RBI from April 2022 onwards and the current interest rate of SDF is Repo Rate
minus 0.25%.
Fixed Reverse Repo Rate:
 The interest rate at which the RBI accepts deposits from the bank against the collaterals of government
securities.
 Currently this rate is fixed at 3.35%.
Open Market Operation (OMO):
 Open market operations are the operations conducted by RBI, under which it purchases flash sale
government securities to inject liquidity or to absorb liquidity from the banking system. It generally
sells government securities in the time of inflation and it may buy government securities in the time of
slowdown.
Long-Term Repo Operation (LTRO):
 Under LTRO, RBI provides longer-term loans (1 to 3 years) to banks at the prevailing repo rate. As
banks get long-term funds at lower rates, they reduce interest rates for borrowers and to help the
economy grow.
Bank Rate:
 Bank rate is the rate at which RBI is ready to buy or rediscount bills of exchange or other commercial
papers. The bank rate acts as the panel rate charged on banks for short faults in meeting their reserve
requirements (CRR or SLR).
 The bank rate is published under section 49 of the RBI act 1934.
 The current bank rate is repo rate plus 0.25% is equal to 6.75%.
Marginal standing Facility (MSF):
 MSF is the panel rate at which banks can borrow, on an overnight basis from the RBI by dipping into
their SLR portfolio up to a predefined limit (2% of the NDTL). This provides a safety valve against
unanticipated liquidity shocks to the banking system.
 The current MSF rate is fixed at Repo Rate plus 0.25%.

