Policy announcements are often peppered with jargons that make the numbers sound more complicated than they are. Here's a rough and ready guide that will help you understand the policy better.
Basis points: Calculations among percentage figures is not the same as calculations among integers. Therefore, while 10 plus 10 equals 20, 10% plus 10% do not equal 20%. This is where basis points and percentage points come in. When the rate increases from 10% to 20%, it is an increase of 10 percentage points. One percentage point is broken down into 100 basis points. Therefore, an increase from 2% to 3% is an increase of one percentage point or 100 basis points.
Repo rate: This is the rate at which commercial banks borrow money from the central bank for a short period of time by selling their securities or financial assets to the central bank with an agreement to repurchase it at a future date at predetermined price. The present rate is 8.5%. The repo rate is used by the central bank to increase liquidity in the system.
Reverse repo rate: The reverse repo rate is the rate of interest at which the central bank borrows funds from other banks for a short duration. The banks deposit their short term excess funds with the central bank and earn interest on it. This rate is used by the central bank to absorb liquidity from the economy. The present rate is 7.5%.
Bank rate: The only way the bank rate is different from the repo rate is that the bank rate is the rate at which banks borrow money from the central bank without any sale of securities. It is generally for a longer period of time. The present bank rate is 9.5%.
Cash reserve ratio: CRR is the minimum percentage of cash deposits that banks must keep with the central bank. The current rate is 4.75%, which means for a cash deposit of Rs 100, the bank has to park Rs 4.75 with the central bank.
Marginal Standing Facility: The Reserve Bank of India in its monetary policy for 2011-12 introduced the marginal standing facility under which banks could borrow funds from RBI when there is a considerable shortfall of liquidity. This measure has been introduced by RBI to regulate short-term asset liability mismatches more effectively. Under this facility, banks can borrow up to 1% of their net demand. The current MSF rate is 9.5%.
Liquidity Adjustment Facility: Under this facility, banks borrow from the central bank by pledging government securities.
Statutory Liquidity Ratio: This is the percentage of deposits that banks must mandatorily hold in the form of government bonds. SLR bonds are liquid assets that can be sold at a short notice to meet any unexpected demand from depositors.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
