This document discusses several key monetary policy tools used by the Reserve Bank of India (RBI) to regulate the money supply and control inflation in India. It explains that the bank rate is the rate at which RBI lends to other banks, and an increase in bank rate will likely lead to an increase in other lending rates. It also discusses the cash reserve ratio (CRR), which is the amount of funds banks must keep with RBI, and how increasing the CRR drains excess liquidity from banks. The statutory liquidity ratio (SLR) requires banks to maintain a minimum level of liquid assets. Other tools covered include the repo rate, reverse repo rate, prime lending rate, and base rate. The document

2. BANK RATE
This is the rate at which central bank (RBI) lends money to
other banks or financial institutions. If the bank rate goes
up, long-term interest rates also tend to move up, and vice-
versa. Thus, it can said that in case bank rate is hiked, in
all likelihood banks will hikes their own lending rates to
ensure and they continue to make a profit.

3. CASH RESERVE RATIO
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with
RBI. If RBI decides to increase the percent of this, the available amount with the
banks comes down. RBI is using this method (increase of CRR rate), to drain out
the excessive money from the banks.
RBI uses CRR either to drain excess liquidity or to release funds needed for the
economy from time to time. Increase in CRR means that banks have less funds
available and money is sucked out of circulation. Thus we can say that this serves
duel purposes i.e. it not only ensures that a portion of bank deposits is totally
risk-free, but also enables RBI to control liquidity in the system, and thereby,
inflation by tying the hands of the banks in lending money.

4. STATUTORY LIQUIDITY RATIO
Every bank is required to maintain at the close of business
every day, a minimum proportion of their Net Demand and
Time Liabilities as liquid assets in the form of cash, gold and
un-encumbered approved securities. The ratio of liquid assets
to demand and time liabilities is known as Statutory Liquidity
Ratio (SLR).RBI is empowered to increase this ratio up to
40%. An increase in SLR also restrict the bank’s leverage
position to pump more money into the economy.

5. Repo (Repurchase) rate
The rate at which the RBI lends shot-term money to the banks. When the repo rate
increases borrowing from RBI becomes more expensive. Therefore, we can say that
in case, RBI wants to make it more expensive for the banks to borrow money, it
increases the repo rate; similarly, if it wants to make it cheaper for banks to
borrow money, it reduces the repo rate
Reverse Repo
Rate is the rate at which banks park their short-term excess liquidity with the
RBI. The RBI uses this tool when it feels there is too much money floating in the
banking system. An increase in the reverse repo rate means that the RBI will
borrow money from the banks at a higher rate of interest. As a result, banks would
prefer to keep their money with the RBI

6. PRIME LENDING RATE
The interest rate that commercial banks charge their best, most credit-worthy
customers. Generally a bank's best customers consist of large corporations. The
rate is determined by the Federal Reserve's decision to raise or lower prevailing
interest rates for short-term borrowing. Though some banks charge their best
customers more and some less than the official prime rate, the rate tends to
become standard across the banking industry when a major bank moves its prime
up or down. The rate is a key interest rate, since loans to less-creditworthy
customers are often tied to the prime rate. Many consumer loans, such as home
equity, automobile, mortgage, and credit card loans, are tied to the prime rate.

7. Base Rate
It is the minimum rate of interest that a bank is allowed to charge from its customers.
Unless mandated by the government, RBI rule stipulates that no bank can offer loans at a
rate lower than BR to any of its customers.
Base Rate System is for the banks to set a level of minimum interest rates charged while
giving out the loans. This Base Rate System has many advantages over the older method
of Prime Lending Rate (PLR). One advantage is, in the Prime Lending Rate (PLR), one
could sanction the loan for lower price for the preferred customer or the corporate bodies
and retail customers may have to pay more for the same type of loans. In the base rate
system, there will not be much variance on the loans.
However, the base rate system will not be applicable for the following type of loans:
•Agricultural Loans
•Loans given to own employees
•Loans against deposit
•Export Credit
.

8. HOW IS IT DIFFERENT FROM BANK PRIME LENDING RATE?
BR is a more objective reference number than the bank prime lending rate
(BPLR) -- the current benchmark. BPLR is the rate at which a bank is willing to
lend to its most trustworthy, low-risk customer. However, often banks lend at
rates below BPLR. For example, most home loan rates are at sub-BPLR levels.
Some large corporates also get loans at rates substantially lower than BPLR.
For all banks, BR will be much lower than their BPLR

9. Particulars Current rate LAST RATE
BANK RATE 6% (w.e.f. 29-4-2003)
CRR 6% (w.e.f.24-4-2010 ) 5.75%
SLR 24% (w.e.f.18-12-2010) 25%
REVERSE REPO 5.50% (w.e.f. 25-1-2011) 5.25%
REPO 6.50% (w.e.f. 25-1-2011 ) 6.25%

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