RR - RRR - CSR - SLR

Important bank rates in India:

The 4 most important bank rates in India, as decided by the Reserve Bank of India (RBI) are:

• Repo Rate (RR)
• Reverse-Repo Rate (RRR)
• Cash Reserve Ratio (CSR)
• Statutory Liquidity Ratio (SLR)

The above rates are decided by the RBI, in order to regular the cash flow in our country. In times of inflation, these rates are very helpful to bring the economy back on track. Sometimes, the rates are also increased/decreased so as to give a boost to a particular industry in the country if needed.

Repo Rate (RR):
The rate of interest at which the RBI gives loans to other banks is called the Repo Rate (RR).

To explain it further...when we are in need of money, we approach banks, who lend us money at an interest rate. In a similar scenario, when banks are in need of cash (for something legal of course), they approach the RBI, which lends them money at an interest rate. This interest rate is called the Repo Rate

• Lower Repo Rates => banks can get money cheaper
• Higher Repo Rates => banks can get money of course, but at a higher rate (expensive i.e)

RBI also takes approved Bank securities as a collateral/security and lends money to banks

Reverse Repo Rate (RRR):
The rate of interest at which RBI "borrows" money from banks is called the Reverse Repo Rate (RRR).

Wouldn't we be happy to lend our money to others and earn the interest for the same?? Similarly, banks are allowed to do the same. However, banks lend their money (deposits of the public of course) to a safe customer i.e RBI for a very good interest rate!!

• Higher Reverse Repo Rate => more interest for banks, hence banks transfer more funds to the RBI (implies more liquid cash is moved out of the system)
• Lower Reverse Repo Rate => lesser interest for banks, hence they don't transer that much funds now :)

RBI also sells Govt. Bonds to banks with the committment of buying them back at a future date

Cash Reserve Ratio (CRR):
It is the amount of money per customer, that every bank in India has to deposit with the RBI
i.e Every time a customer deposits cash to a bank, the latter has to deposit a portion of that cash at the RBI. Eg: Say the CRR is 10%, and I deposit Rs.1000/- to a bank. The bank has to deposit 10% of Rs.1000/- (Rs.100) to the RBI. The remaining Rs.900/- can be used by the bank to give out loans and earn a profit.

Main purpose behind the CRR:

1. The CRR can influence the credit conditions in our country (WRT liquidity). i.e
• If CRR is higher => lesser amount of liquid cash in circulation in the country
• If CRR is lower => increased amount of liquid cash in circulation in the country
2. To satisfy withdrawal demands
3. To Protect the depositors' money to a certain extent (very important I would say :))

If RBI reduces CRR, then banks would have more surplus cash, which they would lend out to the public and create a positive infuence on the economy.

Statuatory Liquidity Ratio (SLR):
We now know that a portion of a bank customer's deposits has to be deposited with the RBI as cash.

Additionally, banks are also required by RBI to maintain a minimum % of their deposits at the end of every business day, in the form of gold, cash, Governement bonds or other such approved securities, which is known as Statutory Liquidiy Ratio (SLR).

The maximum limit for SLR is 40%

In times of high growth, an increase in the SLR parameter reduces the lendable resources of banks, and hence pushes up the interest rates.

PPP - FDI - FII

Purchasing Power Parity (PPP):

• With increasing globalization, there is a need to measure and compare standards of living between countries, production of goods & services and their prices, showcase standard of living for foreign investors, traders, potential immigrants, etc..
• To compare money's value, exchange rate can be very useful. But it ignores the domestic economic sectors where prices are not fixed
• Purchasing Power Parity or PPP converts the local currency into a common currency and then compares the buying power of different countries (now it is on a common scale)
• PPP is a method of measuring the effective purchasing power of different countries' currencies over the same type of goods & services
• While comparing PPP of different countries, a standard single currency should be taken. Eg: US dollar; which gives an idea of what could be bought in that country

Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII):

FDI and FII are both related to investments in a foreign country. Eg: US companies investing in the India, Indian companies investing in Singapore or China

Comparative points between FDI and FII:

1. FII is an investment made by an investor in the markets of a foreign nation whereas FDI is an investment by a parent company in a foreign country
2. FII is also known as 'hot money', as investors have the liberty to sell or take it back with them. A FII can enter and withdraw from the stock market easily whereas FDI cannot enter and exit that easily
3. On a comparitive scale, FDI is the more beneficial kind of foreign investment among the two
4. FII investment flows into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise whereas FDI only targets a specific enterprise, with an aim to increase the enterprise's capacity/productivity/management control. The capital flow is translated into additional production
5. Last but not least, FII are short-term investments whereas FDI are long-term investments