Reserve Bank of India is the apex Institution of India's monetary system and
financial system and plays a leading role in organizing, running, supervising,
regulating and developing the monetary and financial system. Preparing and
conducting the monetary policy and credit policy are special responsibilities
of Reserve bank of India.
RBI expresses its view on economy through changes in monetary policy
which is known as Annual Policy Statement. The policy is released every
year in April and is reviewed every quarter.
Reserve Bank of India Governor D. Subbarao has released its annual
monetary Policy statement on April 20, 2010 for the year 2010-11. This was
followed by the first quarter review of monetary policy for 2010-11 on July
27, 2010. On September 16, 2010, the Mid-Quarter Monetary Policy Review
has been released.
Following are the main points of this policy statement:
Cash reserve ratio (CRR):
CRR is the percentage of cash deposits that banks have to maintain with
RBI.
The RBI had hiked the CRR by 75 points in January 2010. This absorbed Rs.
36000 Crores from the system. In the Annual Policy 2010-11 the CRR was
increased by an increase of 25 basis points from 5.75 to 6.0 percent has taken
effect from April 24. This sucked out Rs. 12500 Crores from the banks.
This move means that banks have to park more money with the central
bank. This money does not earn any interest to them (or negligible returns)
and sucks out the liquidity in the banking system. As a result, banks have
lesser money with them to lend. This could lead to higher interest rate as
there isn't enough liquidity in the system.
This affects the bank in the form of increased cost of funds because they have
to keep more money for negligible returns on it. The banks pass on this cost to
their customers and thus loans become dearer.
It must be noted down that RBI had slashed frequently the CRR during 2008
& 2009 to maintain high liquidity in the system as a measure to fight the
financial slowdown. The excess liquidity causes the bank to lend more and
thus interest rates came down.
Repo Rate:
Repo Rate is the rate of interest at which the RBI lends money to banks.
This also means that Repo Rate is the RBI's lending rate to other banks.
When RBI reduces the Repo Rate, the banks can borrow more at a lower
cost. This contributes to lowering of the rates.
In the Mid-Quarter Monetary Policy Review, September 2010-11 the RBI has
hiked the Repo rate by 25 basis points from 5.75 per cent to 6.0 per cent with
immediate effect. This means that RBI has increased its lending rate to other
banks by .25%. For banks the borrowing from RBI becomes costlier.
Thus we can see that change in Policy rates has a direct impact the lending
and borrowing rates of the banks. The consumers get affected accordingly.
Note: There is No Change in Other rates. The key Policy rates are as
follows:
Policy Rates
Base Rate : 6.0%
Repo Rate : 6.0%
Reverse Repo: 5.0%
Reserve Ratios
CRR : 6%
SLR : 25%
2. Actively manage liquidity to ensure that the growth in demand for credit by
both the private and public sectors is satisfied in a non-disruptive way.
3. Maintain an interest rate regime consistent with price, output and financial
stability.