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The statutory liquidity ratio (SLR) is the ratio (fixed by the RBI) of the total deposits of a bank which is to be maintained by the bank with itself in non- cash form prescribed by the government to be in the range of 25 to 40 per cent.10
The ratio was cut to 25 per cent (done in October 1997 after CFS suggestions).11 It used to be as high as 38.5 per cent. The CFS has recommended the government not to use this money by handing G-Secs to
the banks. In its place a market-based interest on it should be paid by the government, it was being advised. However, there has been no follow up in this regard by the governments. The Government of India has removed the 25 per cent floor for the SLR by an Amendment (2007) providing the RBI a free hand in fixing it—by March 2017 it was 20.50 per cent.
The interest rate which the RBI charges on its long-term lendings is known as the Bank Rate. The clients who borrow through this route are the Government of India, state governments, banks, financial institutions, co- operative banks, NBFCs, etc. The rate has direct impact on long-term lending activities of the concerned lending bodies operating in the Indian financial system. The rate was realigned12 with the MSF (Marginal Standing Facility) by the RBI in February 2012. By March 2017, it was 6.75 per cent.
The rate of interest the RBI charges from its clients on their short-term borrowing is the repo rate in India.13 Basically, this is an abbreviated form of the ‘rate of repurchase’ and in western economies it is known as the ‘rate of discount’.14
In practice it is not called an interest rate but considered a discount on the dated government securities, which are deposited by institution to borrow for the short term. When they get their securities released from the RBI, the value of the securities is lost by the amount of the current repo rate. The Call Money Market of India (inter-bank market) operates at this rate and banks use this route for overnight borrowings. This rate has direct relation with the interest rates banks charge on the loans they offer (as it affects the operational cost of the banks). The rate was 6.25 per cent in March 2017.
In October 2013, RBI introduced term repos (of different tenors, such as, 7/14/28 days), to inject liquidity over a period that is longer than overnight. It has several purposes to serve—stronger money market, stability, and better costing and signalling of the loan products.
It is the rate of interest the RBI pays to its clients who offer short-term loan to it. At present (March 2017) the rate is at 5.75 per cent.
It is reverse of the repo rate and this was started in November 1996 as part of liquidity Adjustment Facility (LAF) by the RBI. In practice, financial instituions operating in India park their surplus funds with the RBI for short- term period and earn money. It has a direct bearing on the interest rates charged by the banks and the financial institutions on their different forms of loans.
This tool was utilised by the RBI in the wake of over money supply with the Indian banks and lower loan disbursal to serve twin purposes of cutting down banks losses and the prevailing interest rate.15 It has emerged as a very important tool in direction of following cheap interest regime—the general policy of the RBI since reform process started.