5) What are the key rates the RBI employs?
The key policy or 'signalling' rates include the repo rate, reverse repo rate, cash reserve ratio and statutory liquidity ratio.
Repo rate is the rate at which RBI lends to banks for short periods. If the RBI wants to make it more expensive for banks to borrow money, it increases the repo rate. If it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term. The banks use this facility to deposit their short-term excess funds with the RBI and earn interest on it.
RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks.
Cash Reserve Ratio, or CRR, is the amount of funds that banks have to park with RBI. If RBI decides to increase the cash reserve ratio, the available amount with banks would reduce. The central bank increases CRR to curb surplus liquidity.
Statutory Liquidity Ratio, or SLR, is the minimum percentage of deposits banks have to maintain with the RBI. It can be in the form of gold, cash, government bonds or other approved securities.