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Banking Awareness RBI Policy Rates

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November 4, 2017

As we all know in many bank exams banking awareness questions are asked. In today’s story we will see about RBI Policy Rates and Reserve Ratio. Reserve Bank of India ( RBI ) is India’s leading central banking institution which controls the monetary policy of Indian rupee. Monetary Policy controls the supply of money to ensure price stability and general trust in the currency. It also aims at contributing to economic growth and stability to lower unemployment and maintaining exchange rates with other countries. We will look into RBI Policy Rates and Reserve Ratio which are very important from exam perspective.

Banking Awareness – RBI Policy Rates and Reserve Ratio

When we talk about Policy rates, We have mainly four types of policy rates which we should understand.

  1. Policy Repo Rate
  2. Reverse Repo Rate
  3. Marginal Standing Facility Rate ( MSF )
  4. Bank Rate

Policy Repo Rate

Repo rate is the rate at which central bank i.e Reserve bank of India lends money to the commercial bank. Repo rate and reverse repo rate plays an important role in controlling the inflation. At the event of inflation RBI increases the repo rate which acts as a financial disadvantage for banks taking money from RBI. Hence, the supply of money reduces in the market and inflation is controlled.

Reverse Repo Rate

If you understood Repo rate then Reverse Repo Rate can be easily understood. Reverse Repo rate is the rate at which central bank ( RBI ) lends money from the commercial bank. When the reverse repo rate is increased, it is very beneficial for banks to park money. In this way the supply of money in the economy can be controlled.

Repo rate and reverse repo rate

Marginal Standing Facility Rate

Marginal Standing Facility Rate ( MSF ) is a window where a bank can borrow money by placing government security at rate higher than the repo rate under some emergency situations when the interbank liquidity has dried up. Under MSF, banks can borrow up to 1% (100 basis point) of their net demand and time liabilities ( NDTL ). NDTL represents a bank’s total deposits and borrowings from others.

Bank Rate

Bank rate is that rate which is charged when a commercial bank borrow money from central bank ( RBI ). Bank Rate can be considered as same as Repo rate but there are some basic differences. Bank rate is followed when a bank get a loan from Central bank whereas Repo rate is followed when a bank buys securities from RBI.

I think now you should be able to differentiate between different policy rates. The current policy rate ( Dated 4th Nov, 2017 ) are given below

  • Policy Repo Rate : 6.00%
  • Reverse Repo Rate : 5.75%
  • Marginal Standing Facility Rate : 6.25%
  • Bank Rate : 6.25%

This topic is very important as you can be asked conceptual question on what will happen if the repo rate is increased? In the next session, We will be looking at the different terms related to Banking Awareness – Reserve Ratio. Share this story with your friends. Join IBPS PO Preparation group and study in groups.

Shashi kumar

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I like to help students with their studies. I write articles, solve students queries and enjoy communicating with new people. Join favteacher and connect with me. Ask me any questions by mentioning me @shashi_kumar

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