We continue to read all the news about the reduction or increase of major interest rates during the review of the economic policies by the Reserve Bank of India, but the desire to know about the words used in these stories remains to the common man, It is also difficult to understand the story without knowing the meaning of the terminology.
Repurchase Rate or Repo Rate.
Banks also need large amounts of money for day-to-day operations, and in such a situation, taking loans from the central bank of the country, i.e. RBI (RBI) There is an easy choice. The rate at which the interest bank charges them from such overnight loans, is called a repo rate.
Now you can easily understand that when banks are available at low rates, they can also reduce their interest rates to attract customers, so that the customers who take the borrower can get the maximum increase, and Higher amount can be given on credit. Similarly, if the Reserve Bank hikes the repo rate, taking loans for banks will be expensive, and they will also increase the interest rates charged by their customers.
Reverse Repo Rate.
As its name is clear, it is reversed by repo rate. When banks are left with large amounts of money after day-long work, they keep that money in the reserve bank, on which RBI gives them interest. Now the rate at which the Reserve Bank pays interest on this overnight amount is called a reverse repo rate.
Actually, reverse repo rate markets are used to control the liquidity of liquidity. Whenever there is a lot of liquidity in the markets, the RBI raises the reverse repo rate so that the bank may deposit its amounts in order to earn more interest, and thus leaving less money to leave the market in the possession of the banks .
Cash Reserve Ratio or CRR.
Under the applicable banking rules in the country, each bank has to keep a certain portion of its total cash reserve with the Reserve Bank, which is called cash reserve ratio or cash reserve ratio (CRR).
Such rules have been made so that if at any time the depositors are feeling the need to withdraw money in a large number of banks, then the bank can not refuse to pay the money. CRR is such a tool, with the help of which RBI can reduce the liquidity of the market without changing the reverse repo rate.
In the event of increasing the CRR, banks will have to keep a large portion of the reserve with the Reserve Bank, and will have less money to pay them in the form of a loan. On the contrary, the Reserve Bank reduces the CRR to increase the cash in the market, but the important fact is that changes in the CRR are done only when there is no immediate effect on liquidity in the market, as the repo rate and reverse repo Compared to the rate change, the changes made in the CRR affect the market over a long period of time.