MPC has decided to cut CRR by 100 basis points (bps), repo rate by 50 basis points to increase liquidity in the banking system.
Key policy instruments for liquidity management
- Cash Reserve ratio (CRR): The percentage of cash required to be kept in reserves as against the bank's total deposits with the central bank. , is called the Cash Reserve Ratio.
- Banks can’t lend the CRR money to corporates or individual borrowers, banks can’t use that money for investment purposes. And banks don’t earn any interest on that money.
- Repo rate: The repo rate (repurchase rate) is the interest rate at which the central bank lends money to commercial banks when there is a shortage of funds, usually against government securities.
- Liquidity adjustment facility (LAF): The LAF refers to the Reserve Bank's operations through which it injects/absorbs liquidity into/from the banking system.
- It consists of overnight as well as term repo/reverse repos (fixed as well as variable rates), SDF and MSF.
- SLR: Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities.
- These are not reserved with the Reserve Bank of India (RBI), but with banks themselves. The SLR is fixed by the RBI.
- Other tools: Bank Rate, Standing Deposit Facility (SDF) Rate, Marginal Standing Facility (MSF) Rate, Open Market Operations (OMOs), etc.
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