The Reserve Bank of India, also referred to as RBI, is India's central and regulatory organisation that is in charge of overseeing the country's financial sector. The Government of India's Ministry of Finance is its legal owner. The Indian rupee is issued and supplied by the Reserve Bank of India.
In order to manage exchange rates, serve as a banker's bank, limit inflation, and sustain deflation levels, the RBI oversees banks and other financial institutions. Additionally, it detects counterfeit money and regulates market liquidity and money supply to promote overall economic growth.
The policy repo rate increased by 40 basis points to 4.40 percent on May 4, 2022, from 4.00 percent (bps). The repo rate hasn't been raised since 1 August 2018, although the reverse repo rate is at 3.35 percent.
There are various interest rates fixed by RBI which are as follows:
Cash Reserve Ratio (CRR)
The Reserve Bank of India (RBI) requires that a bank retain a certain percentage of its total deposits as liquid cash reserves, known as the cash reserve ratio (CRR). Controlling inflation is one of the primary goals of CRR. When there is significant economic inflation, the RBI increases the CRR to lower the amount of cash available to banks for loan approvals. The cash reserve ratio (CRR) has increased to 4.50% effective from May 21st 2022.
READ MORE: How does the RBI influence your borrowing decision by changing the repo rate
Statutory Liquidity Ratio (SLR)
The statutory liquidity ratio, or SLR for short, is the minimum amount of deposits that a commercial bank must keep on hand in the form of gold, cash, and other assets. However, rather than being held by the RBI or Reserve Bank of India, these deposits are kept by the banks themselves. The maximum SLR that the RBI can set is 40% p.a. The current SLR is set at 18.00% p.a.
Repo rate, also known as the Repurchase rate can be defined as the rate at which the RBI grants loans or lends to commercial banks against government securities. This idea is similar to how we approach banks when we face a financial crisis so do banks approach the RBI. The current repo rate fixed by RBI is 4.40%. The latest hike in repo rate was done on 4th May 2022 with the bank rate.
Marginal Standing Facility Rate (MSF)
In times of acute financial shortage faced by banks, they can borrow cash from the RBI against their approved government securities. This is undertaken during an emergency and critical situations only. MSF rate is always higher than Repo Rate as the banks use this for emergencies and need funds almost immediately. The current marginal standing facility rate is at 4.65 %.
Savings Deposit Rate
It is the interest rate earned by the account holder for the account that is maintained in the savings account. The RBI now has a savings deposit rate that ranges from 2.70 percent to 3.00 percent.
Base rate is the minimal interest rate that the Reserve Bank of India has set above which banks are not permitted to extend credit to their clients. Base rate is established to increase credit market transparency and guarantee that banks pass along the lower cost of funds to their clients. The new base rate is fixed at the range of 7.25%- 8.80% p.a. by the RBI.
Term Deposit Rate
After depositing money into their account, when the customer agrees to fix it till a particular date is awarded the term deposit rate. The rate set by RBI ranges from 5.00% to 5.60% (for less than a year).
The call rate is the interest rate that banks pay for lending and borrowing money with a maturity of one to fourteen days. On May 22, 2020, the RBI established it at a rate that ranges from 2.00 percent to 4.50 percent.
The interest rate that the Indian Central Bank levies on loans provided to commercial banks is known as the "bank rate." Bank rates directly affect the end-user and are often higher than the repo rate. It is also called the discount rate. The current bank rate is the same as the MSF rate i.e. 4.65%.
Marginal Cost of Funds based Lending Rate (MCLR)
The minimum lending rate below which a bank is not allowed to lend is called the Marginal Cost of Funds based Lending Rate (MCLR). To set the lending rates for commercial banks, MCLR has taken the place of the previous base rate mechanism. On April 1, 2016, the RBI put into place MCLR to set loan interest rates. The range for the current MCLR rate is 6.50 to 7.00 percent.
To conclude, the policy rates can be changed without any prior notice because the Reserve Bank of India is constantly in charge of monitoring the supply of money in the economy and makes decisions which work for the entire economy accordingly.