RBI Policy Rates & Reserve Ratios

The repo rate is the rate at which the RBI lends money to commercial banks against securities. When banks need short-term funds, they can borrow from RBI by selling securities with an agreement to repurchase them. A higher repo rate makes borrowing expensive for banks, which they pass on to customers through higher loan interest rates. Conversely, a lower repo rate reduces borrowing costs.

The reverse repo rate is the rate at which RBI borrows money from commercial banks. When banks have surplus funds, they can park them with RBI and earn interest at the reverse repo rate. This helps RBI absorb excess liquidity from the banking system. A higher reverse repo rate incentivizes banks to park more money with RBI, reducing the money supply in the economy.

CRR is the percentage of a bank's total deposits that must be maintained as liquid cash with RBI. Banks don't earn any interest on this amount. A higher CRR means banks have less money to lend, reducing liquidity in the economy. RBI uses CRR to control inflation and ensure banks have enough cash to meet customer withdrawal demands.

SLR is the percentage of deposits that banks must maintain as liquid assets in the form of cash, gold, or government-approved securities (like government bonds). Unlike CRR, banks can earn returns on SLR investments. SLR ensures that banks invest in safe government securities and maintains solvency. A higher SLR limits the money available for lending.

MSF is an emergency borrowing facility for scheduled commercial banks when inter-bank liquidity dries up. Banks can borrow overnight from RBI at the MSF rate, which is typically 0.25% above the repo rate. Under MSF, banks can even dip into their SLR portfolio (up to a limit) to borrow funds. This acts as a safety valve during tight liquidity conditions.

The bank rate is the rate at which RBI provides long-term loans to commercial banks without any collateral. Unlike repo rate (which is for short-term lending against securities), the bank rate is for long-term lending without security. The bank rate also serves as a penal rate for banks that fail to maintain CRR and SLR requirements. It is typically aligned with the MSF rate.

The call rate is the interest rate at which banks lend and borrow short-term funds (overnight to a few days) among themselves in the inter-bank market. This rate fluctuates daily based on liquidity conditions. RBI's policy rates (repo, reverse repo) create a corridor within which the call rate typically moves. When liquidity is tight, call rates rise; when there's surplus liquidity, they fall.