Repo Reverse Repo CRR & SLR

Repo rate, Reverse Repo rate, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR) are the primary instruments through which RBI implements monetary policy. These tools control the money supply, influence interest rates, and ensure the stability of the banking system. For JAIIB candidates, mastering these instruments is non-negotiable — they are among the most frequently tested topics and are fundamental to daily banking operations.

• CRR is the minimum fraction of total deposits that banks must maintain as liquid cash with the RBI
• Introduced in 1950 primarily as a measure to ensure safety and liquidity of bank deposits
• India follows a "Fractional Reserve Banking System" — banks keep only a fraction of deposits as cash with the central bank

The 2006 amendment bill to the RBI Act removed the cap and the range of CRR between 3% and 20% of a bank's NDTL, providing flexibility to RBI in fixing the CRR.

SLR is the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained in the form of:

• Cash
• Gold (valued at a price not exceeding current market price)
• Unencumbered approved securities (government bonds, dated securities)

Important: The claim that SLR consists only of cash and cash equivalents is incorrect. SLR includes cash, gold, AND approved securities.

Repo (Repurchase Agreement) rate is the rate at which RBI lends short-term money to banks against government securities.

• Banks sell government securities to RBI with an agreement to repurchase them on a mutually agreed future date
• The difference between sale and repurchase price represents the interest cost
• Bank lending rates are determined by the movement of Repo Rate
• Repo rate is the policy rate — changes transmit through the money market to the entire financial system

• It is a short-term arrangement involving an agreement to repurchase securities
• It is NOT a permanent outright sale of government securities

Reverse Repo Rate is the rate at which banks park their short-term excess liquidity with RBI.

• RBI uses this when it feels there is too much money floating in the banking system
• An increase in reverse repo means RBI borrows from banks at a higher rate, incentivising banks to keep money with RBI
• Absorbs liquidity from the system (opposite of repo which injects liquidity)
• Usually lower than Repo Rate, Bank Rate, and MSF Rate

• Used to reduce money flow by absorbing existing cash
• RBI rebalances surplus liquidity by shifting from fixed-rate overnight reverse repo to VRRR auctions of longer maturity

LAF is a monetary policy tool used by RBI to inject or absorb liquidity into/from the banking system.

• Introduced as part of the Narasimham Committee on Banking Sector Reforms (1998)
• Two components: Repo (inject liquidity) and Reverse Repo (absorb liquidity)
• Can manage inflation by increasing and reducing money supply

• Allows banks to deposit money with RBI on an overnight basis
• RBI can absorb liquidity for longer tenors with proper pricing
• Open to all LAF participants
• Introduced under amended Section 17 of the RBI Act (2018)
• NOT eligible for CRR maintenance (Section 42, RBI Act)
• Eligible for SLR maintenance (Section 24, BR Act)

• Decrease policy rates (Repo, Reverse Repo, MSF, Bank Rate)
• Increases money supply and market liquidity
• Causes increase in bond prices and reduction in interest rates
• Lower interest rates lead to higher capital investment
• Makes domestic bonds less attractive → demand shifts to foreign bonds

• Increase policy rates
• Decreases total money supply
• Used to combat inflation by raising interest rates

EBLR benchmarks: RBI repo rate, 3-month T-Bill yield (FBIL), 6-month T-Bill yield (FBIL), or other FBIL rate.

1. CRR: Section 42, RBI Act; maintained as cash with RBI; no interest earned; 2006 amendment removed range cap
2. SLR: Section 24, BR Act 1949; maintained as cash + gold + approved securities; current rate 18%; interest earned
3. Repo Rate = rate at which RBI lends to banks (policy rate); injects liquidity
4. Reverse Repo Rate = rate at which banks park surplus with RBI; absorbs liquidity; usually lower than repo
5. LAF = Repo + Reverse Repo; introduced post-Narasimham Committee II (1998)
6. LAF Corridor: SDF (floor) → Repo (policy rate) → MSF (ceiling)
7. SDF: Amended Section 17, RBI Act (2018); NOT for CRR, YES for SLR
8. MSF: 25 bps above repo; banks dip into SLR up to 2% of NDTL
9. Expansionary = lower rates = more money supply; Contractionary = higher rates = less money
10. Base Rate replaced BPLR (July 2010); MCLR replaced Base Rate (April 2016); EBLR from October 2019
11. Internal benchmarks (Base Rate/MCLR) failed effective transmission → shift to external benchmarks
12. VRRR used to rebalance surplus liquidity from fixed-rate reverse repo to longer-maturity auctions