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Reserve Bank of India is all set to announce its bi-monthly Monetary Policy Statement on Thursday (June 6). The policy statement has an effect on our lives and our finances. But it can be quite a headache to go through all the numbers and financial terms.
We have tried to make things simpler. We've explained terms that will help you understand the policy so that you can be in control of your finances. Read on:
Repo Rate: How does it affect you?
If Reserve Bank lowers Repo Rate, it may mean that interest rate you are being charged by your bank will go down.
However, If the Reserve Bank decides to increase the Repo Rate, you may have to relook at your finances as interest rates may go up, though this may not always be the case.
Interest rates for Home or consumer loans availed at fixed rates will not change.
What's the Scoop?
As inflation is low, market analysts believe that the RBI is likely to lower Repo Rate by 25 basis points, that is, 0.25 per cent. But this is just an expectation.
Currently, the Repo Rate is at 6 per cent.
Technical stuff:
Repo Rate is the rate at which Banks borrow money from Reserve Bank of India. We take a loan from banks when we are low on funds. Similarly, banks may borrow money from the RBI.
Low Repo Rate means banks have to shell out less money to pay interest to the RBI. This increases liquidity in the economy and banks may charge lower
interest rates to customers as they hold more funds as a result of low-interest rate from the RBI.
However, the interest rate will not go below the base rate. Base rate is the rate below which banks are not allowed to lend.
What is Reverse Repo Rate? and how does it affect you?
Increase in Reverse Repo Rate may increase the interest rate for the consumers and vice-versa
The Scoop:
Analysts expect Reserve Bank of India to cut Reverse Repo Rate by 25 basis points, that is, 0.25%. (This again is an expectation). The current Reverse Repo Rate is 5.75 per cent.
Technical Yada Yada:
Reverse Repo Rate is the rate at which Reserve Bank of India borrows money from the banks.
This also is a tool to manage liquidity in the economy.
Higher Reverse Repo Rate is an incentive for banks to park more funds with the reserve bank. This reduces liquidity in the economy.
What is Cash Reserve Ratio (CRR)? What effect does it have on your money?
If Cash Reserve Ratio (CRR) is lowered, interest rates should decrease at least in theory.
What's the Scoop?
Cut in CRR is not being ruled out. All eyes are on the RBI as the suspense will end this Thursday (June 6)
A report prepared by State Bank of India has said that 1.28 lakh crore rupees will be released in the market if CRR is released even by 1 per cent.
Currently, CRR is at 4 per cent.
But what is CRR?
CRR is a fraction of total deposits with a bank kept with Reserve Bank of India. For example, if a bank has 100 Rs in deposits and CRR is 3, it means that the bank will have to deposit 3 Rs with the Reserve Bank of India.
If CRR is raised by the RBI, the banks will have to park more funds with it. This will reduce liquidity in the economy.
If it is decreased, more funds will be available with the banks. This in theory, should bring down interest rates.
Statutory Liquidity Ratio (SLR): How does it affect you and your money?
SLR is a measure of financial stability of the bank you have kept your money in.
The Scoop:
Current SLR is 19 per cent
There are high chances of SLR being slashed by 0.25 per cent as Reserve Bank of India has said a few months ago that it intends to reduce SLR each quarter until it reaches 18 per cent
Technical stuff:
SLR is the percentage of deposits banks have to invest in Central or State government securities.
This way, a fraction of a bank's money is safe with the government. This money is easily redeemable in case funds are required by the bank
This will be Reserve Bank of India's first bi-monthly Monetary Policy announcement after PM Narendra Modi took charge of his office for second tenure.
Although a number of predictions are being made about the Policy announcement, the picture will be clear only when the RBI itself makes the monetary policy public.
Read | RBI likely to go for 35 basis points rate cut: Report
