SLR,CRR,BANK RATE,REPO RATE,REVERSE REPO

What is all this CRR, SLR,Repo,Bank Rate etc. crap ?

ans. it shows the money releationship of banks with RBI.

in short it works like this. I've created following diagram,- click on it which should explain all of those concepts with ease.(yes its watermarked because i don't like people plagiarizing my work.)
CRR, SLR,Repo, reverse repo,Bank Rate UPSC General studies


but before you understand the diagram, read following things


RBI is the banker of the banks (it lends money to other normal banks)
now these normal banks will give us loans - charge interest, thus earn profits.

Now as you know, if people have lot money in their hands then price of products will rise.
So RBI needs to control the amt of money available in the Market = maintain Liquidity.

*What is liquidity ?

* when is there more money in the market & banks = more liquidity= easy to get loans
* less money in market = less liquidity. = hard to get loans

Why do we need liquidity ?

* more money in market = more money for people get borrow.
* so people borrow- invest some where or start some activity / business with it.
* if there is less money in market (and banks) then they'll charge higher interest rate on it. thus getting loans become difficult with less liquidity.
* too much liquidity = easy loans = inflation (price rise of products)

now back to main thing.
its job of RBI to maintain liquidity.
as we know, commerical banks borrow from RBI & lend it to customers to earn profits.
So to control liquidity in the market, RBI will change its CRR, SLR, Bank Rate & Reverse Bank rates, depending on the situation.

BY Mrunal patel