Basic Idea About RBI Functioning

.RBI stands for Reserve Bank Of India; It is also famous as Bank’s Bank. its operations begin in 1935 during Britsh Raj. Regulation of monetary policies to create financial stability in India is its job.

Why we call it banker’s bank????

bank lends us the loan when we require money, and when banks need a loan, they borrow it from RBI.

The function of Reserve Bank of India is not just to Lend loans to Banks. It controls the supply of money, cost of credit, and pay check on Inflation/Deflation.

To fulfill this RBI uses certain tools which are:

  • CRR
  • SLR
  • REPO rate
  • Reverse REPO rate
  1. CRR:- CRR is Cash Reserve Ratio, under this certain percentage of total bank deposits, are to be kept in RBI in the Current account. And banks can’t do any commercial activity from that money, e.g., They can’t lend loan, can’t invest that money any other investment.
  2. SLR:- SLR is Statutory Liquidity Ratio, Apart from CRR Banks also required to maintain some percentage in the form of Gold, Govt. Bonds or other approved securities This minimum rate is known as SLR.
  3. REPO:- When we require money, we approach the bank and bank give that money for the individual interest which is known as the cost of credit. But when banks require money they approach RBI , and RBI lends them money for certain rate which is known as REPO.
  4. Reverse REPO: Reverse REPO is Interest offered by RBI when banks deposit their surplus money with RBI.

Impacts of Changes in CRR/SLR/REPO Rates:

When These rate are cut:

When these rates are cut, then banks are required to deposit less as CRR/SLR. They can lend more, borrow money from RBI at less interest rate. This will decrease rate or Loans, and common people tends to borrow more loans from banks. This injects more money in economy, which leads to more purchase power of common man. If we see it from economy point of view, more purchasing power and limited resources result in Inflation in Economy.

When there rates are increased :

Increase in rates of these tools will lead to costly borrowing from RBI for commercial banks. They have to deposit more in terms of cash and securities in Reserve Bank of India. They will tend to increase the rate of lending loans, and simultaneously common man will borrow less amount as the loan from banks. This affects purchase power of common man and demand for many goods/services will decrease in economy and deflation or less growth rate of inflation will be there.

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