Bank Rates

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Bank rate or Discount rate is the rate of interest which a central bank charges on the loans and advances to a commercial bank.

Whenever a bank has a shortage of funds they can typically borrow it from the central bank based on the monetary policy of the country.

 

Important Terms

Repo Rate

The borrowing is commonly done via repos where the repo rate is the rate at which the central bank lends short-term money to the banks against securities. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from the central bank becomes more expensive.

 

Reverse Repo rate

The reverse repo rate is the rate at which the banks can park surplus funds with reserve bank while the repo rate is the rate at which the banks borrow from the central bank.

The interest rate, charged by a country’s central or federal bank on loans and advances, are used to control the money supply in the economy and the banking sector. This is typically done on a quarterly basis to control inflation and to stabilize the country’s exchange rates. A fluctuation in bank rates triggers a ripple-effect as it impacts every sphere of a country’s economy. For instance, the prices in stock markets tend to react to interest rate changes. A change in bank rates affects customers as it influences prime interest rates for personal loans.

 

Other rates and ratios

CRR

Cash reserve ratio or the reserve requirement sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves (rather than lend out). These required reserves are normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with a central bank.

The required reserve ratio is sometimes used as a tool in monetary policy, influencing the country's borrowing and interest rates by changing the amount of funds available for banks to make loans with.

 

SLR

Statutory liquidity ratio is a tool used by Central banks to control inflation and to boost growth. If the Central bank sets SLR to 25%, then a bank must keep 25% of its total deposits, into non-cash forms prescribed by the central bank (in the form of gold or govt. approved securities, bond, and shares of different companies, before providing credit to the customers).

 


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