Understanding repo rates,reverse repo rates and CRR

In this post we will discuss about the benefits from the falling repo rates,reverse repo rates ,CRR.

Since last few months RBI has been reducing the repo rates,reverse repo rates ,CRR rates.RBI is taking these measures to curb the liquidity crunch that we are facing.

In this post we will discuss what exactly these rates are and how it will help in solving this liquidity problem. 

1.Repo rate :This is the rate at which banks can borrow from RBI.So if repo rate is decreased then the Banks can borrow more money from RBI and thus will have more money to give to the clients in the form of loans etc and vice versa.

2.Reverse repo rate:This is the rate at which the RBI gives interest on the deposits of the banks with RBI.So if reverse repo rate is decreased then the banks will get less interest on the deposits with RBI and so the banks will tend to keep more money with them rather than depositing it with RBI and vice versa.

3.CRR(Cash reserve ratio):This is the ratio or the amount as the %age of deposits required to be parked by the banks with RBI.So by decreasing the CRR the RBI is reducing the amount of %age of deposits which is to be parked by banks with RBI.So mor money will be there with banks and vice versa.

Basically all these measures of reducing the repo rate,reverse repo rate and CRR are taken by RBI to increase the flow of liquidity in the system and thus try to handle this liquidity crunch.

I hope this post will help in understanding these rates and the effect of changes in the rate.