REPO, Rev REPO and CRR Rates

Reserve Bank of India has cut REPO and CRR rates together recently also. Now the REPO rate stands at 6% while CRR stands at 4%.

What is REPO rate?
REPO denotes Re Purchase Option – The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI. In other words, it is the rate at which banks buy back the securities they keep with the RBI at a later period. Now it’s 6.25%.

What is Reverse Repo rate?
Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest.
An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.Now it is 6.00%.

What is CRR rate?
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI. If the central bank decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excessive money from the system. Commercial banks are required to maintain with the RBI an average cash balance, the amount of which shall not be less than 3% of the total of the Net Demand and Time Liabilities (NDTL), on a fortnightly basis and the RBI is empowered to increase the rate of CRR to such higher rate not exceeding 20% of the NDTL.

For example, say if AXIS Bank got a total deposit of Rs. 10 crore with them, they need to keep 4 % of that as cash reserve with RBI.

Need to reduce the CRR ?

The problem with high CRR is that commercial banks lose a significant amount to be locked up in RBI lockers with out getting any interest. Banks lose profit as they cannot spend this amount as loans to the public. There was a debate regarding CRR between SBI chief and RBI governor before. A .25% reduction in CRR will pump around 18000 crore rupees back to the banks, which they can use to give loans.