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 CRR, SLR, Repo Rate and Reverse Repo Rate?

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.

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About Melvin Joseph

SEBI Registered Investment Adviser, SEBI Registration Number : INA000000342. Certified Financial Planner from the Financial Planning Standards Board India (FPSB) and a Fellow of Insurance Institute of India (FIII). I have done Post Graduate Diploma in Financial Advising from Indian Institute of Banking and Finance.
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26 Responses

  1. 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.

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

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

    Thanks
    RUPA

  4. 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.

  5. Thanks , information was very helpful.

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

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

  8. tnx 4 info its very halpfill

  9. Thanks for understanding both of these.

  10. Very useful information ………….

  11. Very nicely explained the four pillars of Banking system. Thanks

  12. Thanks a lot.

  13. nice iformation

  14. A very lucid explanation given..

  15. i like this exaplanation ever till i found….

  16. thank you sir

  17. 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..??

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

  19. thanks a lot sir.

  20. excellent.doubt cleared.

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

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

    Too thanks

  23. sir the diffrance btween repo rate and revarse is called.

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