CRR RATE

CRR Rate in India

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with
RBI. If RBI decides to increase the percent of this, the available amount with the
banks comes down. RBI is using this method (increase of CRR rate), to drain out
the excessive money from the banks.

Relation between Inflation and Bank interest Rates

Now a days, you might have heard lot of these terms and usage on inflation and the
bank interest rates. We are trying to make it simple for you to understand the
relation between inflation and bank interest rates in India.

Bank interest rate depends on many other factors, out of that the major one is
inflation. Whenever you

see an increase on inflation, there will be an increase of interest rate also.

What is Inflation?

Inflation is defined as an increase in the price of bunch of Goods and services

that projects the Indian economy. An increase in inflation figures occurs when
there is an increase in the average level of prices in Goods and services.
Inflation happens when there are less Goods and more buyers, this will result in
increase in the price of Goods, since there is more demand and less supply of the
goods.

CRR(Cash reserve ratio) or the portion of deposits the banks have to keep with the
Reserve Bank of India (RBI).

Indian banks are required to hold a certain proportion of their deposits as cash.
In reality they don’t hold these as cash with themselves, but with Reserve Bank of
India (RBI), which is as good as holding cash. This ratio (what part of the total
deposits is to be held as cash) is stipulated by the RBI and is known as the CRR,
the cash reserve ratio.

IS CRR GOOD FOR INDIAN ECONOMY

ANSWERS-------
No. Hike is CRR (cash reserve ratio) of commercial banks means that, they have to
keep more money as reserves. This reduces the amount of money available for credit
(reduced liquidity) and naturally interest rates will rise. A rising interest rate
means loans are more costly and will affect expansion plans by corporates
resulting in lower overall economic growth.

But it is important to note that hike is CRR is generally done to bring down
inflation!

ANSWER2-------
No.CRR Stadnds for Cash Reserve Ratio.The Reserve bank of India keeps with itself
a percentage of the amount from each bank in proportion to the sum of deposits of
that bank and this percentage is fixed through CRR. Which is increased by the
Reserve bank of India to control the inflation and decreased to increase the
liquidity of cash in the hands of banks. whenever CRR is increased ,the interest
rates goes up for loans.The interest rates for deposit also goes up, because banks
need more money to keep available for loans.And when CRR is decreased the interest
rates for Loans and deposits goes down because now there is more cash available in
liquid form with the banks.

RBI CUTS CRR RATE

Mumbai, Oct 06: The Reserve Bank of India on Monday announced a marginal cut of 50
Basis Points in Cash Reserve Ratio for banks. The rate has been revised from the
current 9% to 8.5%, with effect from October 11.

The cut has been made to increase liquidity in the cash starved market. It will
inject a whopping Rs 20,000cr in the economy.

Announcing the measure, the apex bank has said that this is only an AD HOC
measure, a temporary step in view of the global financial crunch. It said
liquidity management is to be a priority in the current scenario.

The bank also said that it will review the CRR situation on a continuous basis..
The rate has been cut for the first time since June 2003.

The move is being seen as capable to anchor inflation expectations.

Not only the RBI, bourses regulator SEBI also announced measures to increase
foreign fund inflow, by removing the 40% cap on the issuance of P-notes. This was
done after the Sensex plunged by over 700 points, dipping below 12,000.
"It (CRR cut) will begin the process of changing the mindset of Indian business
towards a higher level of confidence," Secretary General of the Federation of
Indian Industry Amit Mitra said.

The FICCI Business Confidence Index for the first quarter of the fiscal had eroded
following rising interest rates and collapse of large banks in the US and the
contagion in several European countries. Mitra wanted the central bank to reduce
the benchmark lending rate as well.

There was a serious problem of liquidity into the system which forced RBI to
inject money on a daily basis using the Liquidity Adjustment Facility (LAF), the
CII said. "The CRR cut will also improve the sentiment in the industry," CII
Director General Chandrajit Banjarjee said.

Assocham President Sajjan Jindal said RBI should now announce cut in the benchmark
lending rate (Repo). "While the measure would release liquidity, the industry
would like RBI to reduce the Repo rate as well," Jindal said.

Exporters also welcomed the move. "We are happy about it. However, the high cost
of borrowing is exerting pressure on the exporting community," President of the
Federation of Indian Export Organisations (FIEO) Ganesh Kumar Gupta said.
REPORT OF RBI

Mumbai: The Reserve Bank of India cut its key short-term rates by 25 basis points
each on Tuesday to shore up faltering growth in the face of the global economic
slowdown.

RBI survey lowers GDP growth forecast to 5.7%

The repo rate, at which the Reserve Bank of India (RBI) infuses cash into the
banking system, will be cut to 4.75 per cent, and the reverse repo rate, at which
it absorbs excess cash from banks, will be reduced to 3.25 per cent, effective
immediately.

The central bank cut is growth estimate for 2008-09, which ended on March 31, to
6.5 to 6.7 per cent, and forecast growth of around 6 per cent for 2009-10.

Negative inflation may pose dilemma for RBI on key policy rates

It said that managing large government borrowing in 2009-10 in a non-disruptive

manner would be a major challenge, and said it would used a mix of monetary and
debt management tools to ensure this was done smoothly.

"Large borrowings also militate against the low interest rate environment that the
Reserve Bank is trying to maintain to spur investment demand in keeping with the
stance of monetary policy," the central bank said in its policy statement.

RBI: major growth drivers moderating

The bank rate, used by banks to price long-term loans, remained at 6 per cent.
Banks' cash reserve requirements were also left unchanged at 5 per cent.

Analysts polled by Reuters were almost evenly split over whether the central bank
would cut rates or not. Six out of the 11 analysts polled expected the bank to
bring down its lending rate by 25 to 50 basis points. The other five forecast the
rate to be held steady.

The RBI has now cut its short-term lending rate by 425 basis points in six steps
since October 20 as the global economic crisis has hit Asia's third-largest
economy harder than expected.

The RBI said wholesale-priced based inflation was expected to turn negative early
in the current fiscal year, but this should not be interpreted as deflation for
policy purposes.

It projected WPI inflation would be around 4 per cent at the end of 2009-10.

The RBI said a planned April 2009 review of the policy on foreign banks in India
would now not go ahead until there was greater clarity regarding stability,
recovery of the global financial system and better global coordination on
regulation and supervision.

BANK LOANS

Mumbai: Banks on Tuesday said they would cut lending rates making home, consumer,
corporate and personal loans cheaper after the Reserve Bank slashed short-term
lending (repo) and borrowing (reverse repo) rates by 25 basis points each in its
annual monetary policy for 2009-10.

RBI cuts a signal for lower rates: SBI

"The policy stance of RBI indicates further softening of the interest rates,"
Oriental Bank of Commerce Executive Director S C Sinha told media.

Banks would bring down lending and deposit rates after reviewing their asset
liability condition. It may not be immediate but would take some time to respond,
he said.

Goldman Sachs on RBI's monetary policy review

Indian Bank Executive Director A Subramanian said that deposit and lending rates
would come down simultaneously. "That is the signal RBI is giving to all banks."
The apex bank cutting down short-term borrowing rate would encourage banks to lend
and earn interest income rather parking funds with RBI and earn reverse repo rate,
he said.

The Chennai-based bank would take a view on the interest rates in the next few
days, Subramanian said.

Annual Policy Statement for the Year 2009-10

In its annual credit policy, RBI reduced repo rate to 4.75 per cent and reverse
repo to 3.25 per cent with immediate effect, while retaining the other key ratios
such as the Cash Reserve Ratio, the percentage of deposits that banks keep with
the central bank.

RBI rate cut would lead to softening of effective lending rate, Subramanian said,
adding that deposit rates would also be cut simultaneously.

'RBI move to help banks cut rates'

UCO Bank Chairman and Managing Director S K Goel had said that the bank would take
a view on the interest rates after the annual credit policy.

The RBI has given enough indication to banks to ease rates, however, private
sector banks have been laggard in the responding to the central bank's signals.

Fund managers react to policy, rate cuts

While public sector banks have reduced their benchmark prime lending rates (BPLR)
as much as 250 basis points post Lehman Brothers crisis in mid-October last year.
Highlights of RBI's monetary policy

RBI has reduced repo rate from 9 per cent in October 2008 to 4.75 per cent now,
while it brought down reverse repo rate from 6 per cent in October last year to
3.25 per cent at present.

Yes Bank Chief Economist Shubhada Rao said the complete pass-through of previous
rate cuts is yet to fully transmit through lower lending and deposit rates in the
banking sector.

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Although interest rates have dropped from their peak levels, there remains a scope
for rates to decline further, she said. We expect this to happen within coming two
quarters when the banking sector will be able to re-price their balance sheets on
liabilities side followed by assets side," Rao added.

Deutsche Bank Ananth Narayan said combination of high liquidity and forceful
message from RBI will probably bring lending rates down. "On the govt bond side
also this combination will work ... We should see bond prices holing up and going
up from here," he said.

REACTION OF FUND MANAGERS

Mumbai: The Reserve Bank of India lowered its key short-term rates by 25 basis
points each and forecast economic growth of 6 per cent for the year that began on
April 1.

Highlights of RBI's monetary policy

The bank cut its reverse repo rate to 3.25 per cent and the repo rate to 4.75 per
cent, effective immediately. It also lowered its estimate for economic growth for
the previous fiscal year that ended March 31 to 6.5 per cent from its previous
estimate of 6.7 per cent.

Following are comments from fund managers to the rate cut and policy comments:

Ashish Nigam, Head-Fixed Income, Religare Asset Management:

"It was an unexpected cut. More worrying is the underlying tone. They have revised
the growth target, they have again reiterated the fact that credit offtake is not
happening. I think that is slightly worrying.

Banking, realty indices trim losses after rate cut

But otherwise I think the sentiment is improved a bit. Yield curve would steepen
further. Short-end would ease by another 25-50 basis points. Long-end would remain
volatile but would depend on supply and demand."

Mahhendra Jajoo, Head-Fixed Income, Tata Asset Management:

"The policy is in line with the current environment - people were expecting a
token cut.
RBI cuts repo, reverse repo rates

"I think that markets are now looking stable and it's positive for the bond
market. I think 10-year (bond yield) can come close to 6 per cent now."

Shobit Gupta, Portfolio Manager-Fixed Income, ING Investments:

"Rate cuts by the RBI emphasises continuation of softer monetary stance by RBI and
will further help in the much-needed transmission of lower interest rates.

RBI survey lowers GDP growth forecast to 5.7%

"We would expect fixed income market to remain positive and looking at 10-year
touching 6.10 per cent levels in near term."

Murthy Nagarajan, Head-Fixed Income, Mirae Asset:

"I expect a rally in bond market. Expect further rate cut in the coming months due
to low GDP growth estimate of 6 per cent levels."

Parijat Agrawal, Head-Fixed Income, SBI Funds Management:

"This quarter-basis-points (cuts), even it was not there, should not have made any
difference.

"The rate cuts are in the right direction but will not have much of an effect.

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"The GDP figure, we feel, will be lower than 6 per cent.

"Though we have low rates, the economy will take some time to pick-up."

REPO RATE DEFINITION

What is a Repo Rate?

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo
rate is the rate at which our banks borrow rupees from RBI. A reduction in the
repo rate will help banks to get money at a cheaper rate. When the repo rate
increases borrowing from RBI becomes more expensive.

CRR Rate in India

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with
RBI. If RBI decides to increase the percent of this, the available amount with the
banks comes down. RBI is using this method (increase of CRR rate), to drain out
the excessive money from the banks.
 Relation between Inflation and Bank interest Rates

Now a days, you might have heard lot of these terms and usage on inflation and the
bank interest rates. We are trying to make it simple for you to understand the
relation between inflation and bank interest rates in India.

Bank interest rate depends on many other factors, out of that the major one is
inflation. Whenever you

see an increase on inflation, there will be an increase of interest rate also.

What is Inflation?

Inflation is defined as an increase in the price of bunch of Goods and services

that projects the Indian economy. An increase in inflation figures occurs when
there is an increase in the average level of prices in Goods and services.
Inflation happens when there are less Goods and more buyers, this will result in
increase in the price of Goods, since there is more demand and less supply of the
goods.

REPO RATE AND REVERSE REPO RATE

A repo or repurchase Agreement is an instrument of money market. Usually reserve

bank (federal bank in U.S) and commercial banks involve in repo transactions but
not restricted to these two. Individuals, banks, financial institutes can also
participate in repurchase agreement.

Repo is a collateralized lending i.e. the banks which borrow money from Reserve
Bank to meet short term needs have to sell securities, usually bonds to Reserve
Bank with an agreement to repurchase the same at a predetermined rate and date. In
this way for the lender of the cash (usually Reserve Bank) the securities sold by
the borrower are the collateral against default risk and for the borrower of cash
(usually commercial banks) cash received from the lender is the collateral.

Reserve bank charges some interest rate on the cash borrowed by banks. This rate
is usually less than the interest rate on bonds as the borrowing is collateral.
This interest rate is called ‘repo rate’. The lender of securities is said to be
doing repo whereas the lender of cash is said to be doing ‘reverse repo’.

In a reverse repo Reserve Bank borrows money from banks by lending securities. The
interest paid by Reserve Bank in this case is called reverse repo rate.

Borrower of funds is called as seller of repo and lender of funds is called as

buyer of repo. When the term of the loan is for one day it is known as an
overnight repo and if it is for more than one day it is called a term repo.

The forward clean price of bonds is set at a level which is different from the
spot clean price by adjusting the difference between repo rate and coupon earned
on the security.