We often see the Central Bank of a nation meets and announces the Monetary Policy.This policy has a significant impact on the overall economic development of a country.It controls the cash supply to the market.Monetary policies are usually reviewed on quarterly basis.There are some rates and ratios through which the Central Bank controls money flow into the system.
This leads to the influence on the cash supply to the commercial banks.This further impacts the lending capacity of these banks.Let us find out these rates : –
- Bank Rate : – The rate at which the credit is extended to the commercial banks.
- Statutory Liquidity Ratio ( SLR ) : – It is the ratio or percentage to its total deposits which a bank needs to maintain with itself at any given point of time in liquid form like cash.
- Cash Reserve Ratio (CRR ) : – It is the percentage of total deposits of a commercial bank which it needs to keep with the Central Bank.
- Repo Rate : – It is the rate at which the Central Bank borrows cash from the commercial banks.
- Reverse Repo Rate : – It is the rate at which the commercial banks park their money with the Central Bank.
When the Inflation Rate is high,the Central Bank may raise these rates thus leading to sucking of money from the market or the system.This leads to rising bank rates thus making loans and EMIs ( Equated Monthly Instalments ) costlier.Rates on bank deposits also rise consequently.
When Inflation Rates trend lower , the Central Bank may lower these rates.This relaxation leads to release of money into the system,leading to loans and EMIs becoming cheaper.Rates on bank deposits also decline.