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What is CRR, SLR, Repo Rate and Reverse Repo Rate?

Reserve Bank of India plays an important role in controlling the interest rates in the banking system, by adjusting the liquidity in the system.

How RBI control the interest rates in India? If you want to understand the above, we should understand certain commonly used terms by RBI.

These are CRR, SLR, Repo Rate and Reverse Repo Rate.

The Reserve Ratio is the Ratio of

What is Cash Reserve Ratio (CRR)

Each bank has to keep a certain percentage of its total deposits with RBI as cash reserves. It is called Cash Reserve Ratio (CRR). On 30th October.2012, RBI reduced the CRR by 25 basis points to 4.25%. If the bank is having a deposit of 100/-, it has to keep Rs.4.25 as cash reserve with RBI and it can use only the balance 95.75 for lending or investments.

What is the role of CRR in the banking system

RBI uses CRR as a means to control the money supply in the system. When the money supply is on the higher side, RBI will increase the CRR to reduce the supply and vice versa.

What is Statutory Liquidity Ratio (SLR)

Every bank has to maintain at the close of every day a certain percentage of its total liabilities (Deposits) in cash, gold or government approved securities. This is called SLR. At present, the SLR is 23%.

What is the role of SLR in the banking system

Its role is more or less similar to CRR and controls the money circulation the banking system. If RBI wants to suck, excess liquidity from the system, it will increase the SLR. Banks will be forced to keep the higher percentage as liquid assets and its power to lend will come down.

What is Repo Rate

When banks require short term money, RBI will lend member banks against securities held by them. RBI will charge interest on these loans and this rate of interest is called Repo Rate. At present, Repo Rate is 8%.

What is the importance of Repo Rate in the economy

When RBI wants to decrease the lending activities in the country, it will increase the Repo Rate. Once the Repo Rate is increased, the cost of funds to banks from RBI will increase and it will in turn increase the lending rates to customers. This will reduce the lending transactions. But if the RBI feels the need of more lending activities, it will decrease the Repo Rate and reduce the cost of funding. This will translate into lower rates on loans and lending will pick up.

What is Reverse Repo Rate

If banks have excess amount with them, they can park the surplus money with RBI and earn interest on this. The interest on such amount is called Reverse Repo Rate. At present the Reverse Repo Rate is 7%.

RBI will increase the reverse Repo rate, if it wants to reduce liquidity in the system. Banks will be tempted to park money with RBI rather than lending, if this rate is high. At present Reverse Repo Rate is kept 100 basis points below Repo Rate.

By adjusting CRR, SLR, Repo Rate and Reverse Repo Rate, RBI will ensure that the banking system is working fine.  It will adjust these factors to promote an orderly growth of the economy by controlling interest rates and liquidity in the system.

27 Comments

  • sajeevan Posted November 21, 2012 9:35 pm

    It would have been better if the details were a bit more elaborated along with an example in each case. This would be more useful for a better understanding for readers with a non-commerce back-ground.

    This applies all postings made by you.

    Thanks
    Sajeevan.

  • vijay Posted November 22, 2012 11:18 pm

    Thanks for teaching Basics .
    Useful to understand a few basics of Monetary functions of Banking.

  • Rupa Ghindode Posted January 15, 2013 6:48 pm

    i would like to pay thanks for such a
    good discription its helpfull to know
    about banking terms

    Thanks
    RUPA

  • abhi Posted January 22, 2013 9:27 am

    thanks.

  • Dr.M.C.GEORGE,Advocate Posted February 4, 2013 9:45 am

    Thanks for the information suplied. In this connection it will be very helpful to make some assesments about the steps taken by banks in their business to the RBI initiatives in this regard. Hence a comparison with different rates of RBI and the lending rates Viz. Base rate, PLR, Farm loans ect. will help.
    Please give the CRR, SLR, Repo & Reverse Repo rates for 2010 Jan., July, 2011 Jan.&july, 2012jan. &july, 2013jan.
    Total bank deposit, total advance showing priority sector advance with amount for each subsectors viz. 18% farm sector and actual percentage as on date. Thanks once again. Dr.M.C.GEORGE,ADVOCATE,INFAM(IndianFarmersMovement)National Trustee.

  • shrey kohli Posted February 4, 2013 11:40 pm

    Thanks , information was very helpful.

  • Venkatesh Kolluru Posted February 9, 2013 11:57 am

    Hi thanks for posting the banking related interview questions, it’s very useful to me. Venki.K

  • shashank shekhar singh Posted February 10, 2013 7:26 pm

    Hey thnx! information provided by u is vry vry imprtnt.as i m preparing 4 my intrvw. It helps me a lot.

  • sharad pansare Posted February 12, 2013 11:59 am

    tnx 4 info its very halpfill

  • sachendra Posted February 20, 2013 11:16 am

    Thanks for understanding both of these.

  • pramod Posted February 20, 2013 12:52 pm

    nice

  • suresh sajjan Posted February 24, 2013 11:58 am

    Very useful information ………….

  • Ajit Teli Posted March 4, 2013 8:57 pm

    Very nicely explained the four pillars of Banking system. Thanks

  • abhijit Posted March 6, 2013 5:16 pm

    Thanks a lot.

  • rohit panday Posted March 10, 2013 6:15 pm

    nice iformation

  • anamika Posted March 11, 2013 1:52 pm

    A very lucid explanation given..

  • ankit rai Posted March 15, 2013 10:20 am

    i like this exaplanation ever till i found….

  • satarupa biswas Posted March 17, 2013 2:46 pm

    thank you sir

  • Bidya Posted March 19, 2013 6:32 pm

    CRR is the rate fixed by The RBI for every Banks to keep a certain percentage of their deposits [at present 04%] with RBI,
    AND SLR is to maintain some percent [at present 23%] with theme from daily deposits..

    My Query is..
    Whether SLR is inclusive of CRR..??

    • Melvin Joseph Posted March 23, 2013 4:15 pm

      No, both are different.

  • Bhagya hosamani Posted March 31, 2013 1:57 pm

    Thank you for explanation. i got to know about basics..

  • nisha Posted April 9, 2013 12:37 pm

    thanks a lot sir.

  • PANKAJ KUMAR Posted April 10, 2013 4:19 pm

    excellent.doubt cleared.

  • DEEPAK TOMAR Posted April 23, 2013 1:56 pm

    THANKS A LOT FOR THE PERFECT EXPLANATION I FOUND IT AS GOOD ANSWER..AMONG ANYWHERE..

  • ravikumar Posted July 30, 2013 11:54 am

    abbreviation are very useful to me because im non commerce background. Iam looking for know this banking terms

    Too thanks

  • sandeep soingh Posted September 30, 2013 8:51 am

    sir the diffrance btween repo rate and revarse is called.

  • Sagar Parashar Posted November 18, 2014 11:49 am

    Yes, It is very usufull to understand basics of the banking..

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