The document discusses various monetary policy tools used by the Reserve Bank of India (RBI) and their impact on the Indian economy. It explains that RBI uses tools like the cash reserve ratio (CRR), statutory liquidity ratio (SLR), and repo rate to control money supply and fight inflation/deflation. Raising CRR or SLR reduces money available for bank lending, increases interest rates, and slows economic growth. Lowering them has the opposite effects. Similarly, raising the repo rate increases business loan costs, reduces spending and growth, while lowering repo rate stimulates growth. In conclusion, RBI periodically uses these tools to manage liquidity and influence economic activity across sectors and the nation as a whole.

1. Impact of Repo Rate, CRR, SLR
on
Indian Economy

2. Agenda :
1. What is Monetary Policy ?
2. Cash Reserve Ratio (CRR)
 How does CRR affect economy ?
3. Statutary Liquidity Ratio (SLR)
 How does SLR affect economy ?
4. Repo Rate or Repurchase Rate
 What’ll be the consequences of Repo Rate ?
5. Conclusion

3. What is Monetary Policy?
 Policy made by the central bank (RBI).
 To control money supply in the economy. (and thereby fight both inflation and deflation).
 RBI implements monetary policy using certain tools.
Monetary Policy
Tools
Quantitative
Tools
Bank Rate, CRR, SLR,
Repo Rate, Reverse
Repo Rate, OMO
Qualitative
Tools
Direct Action, Moral
Persuasion,
Legislation, Publicity

4. Cash Reserve Ratio (CRR)
 Scheduled Commercial Banks(SCBs) in India are required to hold a certain proportion of their Demand and Time
Liabilities with RBI as per Section 42(1) of the Reserve Bank of India Act, 1934.
 This minimum ratio is stipulated by RBI and is known as the Cash Reserve Ratio (CRR).
 Current CRR Rate is 4%.
 Drain out excessive liquidity from the banks
 Release funds needed for the growth of the economy from time to time
 Secure solvency of the banks

5. How does CRR affect economy ?
When the CRR is -
Hiked Lowered
Banks have less money for lending
To maintain profit margin, banks
increase lending rate
Customers borrow less and eventually
spend less
Demands for goods and services thus
comes down
Slow down in economy
Banks have more money for lending
Lower interest rate
Cheap loan
More people take more loan
Boost in economy

6. Statutary Liquidity Ratio (SLR)
 It is the proportion of the total deposits which commercial banks are required to maintain with the Central
bank in the form of liquid assets like cash, gold, Govt. Bonds and securities.
 SLR = {Liquid assets/(Demand + Time Libilities)} x 100
 RBI is empowered to increase this ratio upto 40%
 Current SLR rate is 21.5%
 To restrict expansion of the bank credit
 To increase bank’s investment in Govt. Securities
 To ensure solvency of the banks
24%
25%
24%
23%
22.50%
22%
21.50%
19%
20%
21%
22%
23%
24%
25%
26%
SLR
Nov-08 Oct-09 Dec-10 Aug-12 Jun-14 Aug-14 Feb-15

7. How does SLR affect economy?
When the SLR is -
Hiked Lowered
Cash reserves of commercial banks
decrease
Rate of interest increase
Price of credit increase
Demand for credit decrease
Credit contracts in economy
Cash reserves of commercial banks
increase
Rate of interest decrease
Price of credit decrease
Demand for credit increase
Credit expands in economy

8. Suppose economy is showing inflationary trend:
 How can RBI stop it using Reserve ratio as a tool?
 In this case, RBI should RAISE the reserve ratios.
Observe:
Example Right now:
(CRR – 4% & SLR – 21.5%)
Originally:
(RBI raises CRR to 15% and SLR
to 40%)
People deposited total this much
money in ABC Bank (NDTL) 100 cr. 100 cr.
CRR [ has to keep this much cash
aside for reserve] - 4 cr. - 15 cr.
SLR [ABC Bank has to invest this
much money in RBI approved
securities]
- 21.5 cr. - 40 cr.
Money left with ABC Bank 100 – 4 – 21.5 = 74.5 Cores. 100 – 15 – 40 = 45 Cores.

9. When Raghuram Rajan has raised reserve ratio, money with ABC Bank is reduced from 74.5 crores to just 45
crores.
 ABC Bank raises its loan interest rate
 Businessmen borrow less money from ABC Bank
 Businessmen donot start new business or Donot expand existing business
 Result = Less jobs
 Result = Less income (Because of above reasons)
 Result = Less demand of goods and services (because less income)
 Ultimately shopkeeper will bring down the prices to attract people into buying more things
*Thus inflation is reduced.
Consequences:

10. Repo Rate or Repurchase Rate
 Repo Rate or Repurchase Rate is the rate at which banks borrow money from the Central Bank (RBI).
 It is for short period.
 The banks sell their securities (Financial Assets) with an agreement to repurchase it at future date at
predetermined price.
 Current Repo Rate is 6.75%.
What if the Repo Rate is –
LoweredHiked
 Decrease in money supply
 Discourage business growth
and consumer spending
 Loans get costlier
 Increase in money supply
 Increase in demand of goods
 Increase in GDP growth

11. Let’s get a bit technically correct now.
Observe following image :
100 Crores
6.75%
6 Months

12. What’ll be the consequences (if repo rate is hiked / increased)?
 SBI raises its loan interest rate (to keep profit margin same)
 Businessmen borrow less money from SBI.
 Businessmen do not start new business or do not expand existing business.
 Less jobs
 Less income
 Less demand
 Ultimately shopkeeper will bring down
the prices to attract people into buying more things.
*Thus inflation is reduced.
7.75%
7.50%
7.25%
6.75%
6.20%
6.40%
6.60%
6.80%
7.00%
7.20%
7.40%
7.60%
7.80%
8.00%
Jan'15 March'15 June'15 Sept'15
Repo Rate

13. Conclusion :
 Thus we can see that changes in Monetary policy drastically affects the common
people and the nations economy as a whole.
 RBI uses the tools of monetary policy periodically to infuse and drain out excess
liquidity out of the market.
 All the Nationalised Banks and Corporate firms count highly on the RBI rates to
garner business from there segments.
 In General we can conclude that a Nation’s whole economy count heavily on the
monetary policy of it’s Central bank for its prosperity.

14. Thank You