Spend, Save and Invest Smartly
You might have thought many times that what does these big economists do and how does their decisions affect us…..? So this time we are trying to take you through some of the main concepts of economic policies and the affects of those on each of us the so called “Aam Aadmi”. So basically there are two kinds of economic policies taken by a Govt. or regulatory bodies, such as Monetary and Fiscal policies. Monetary policies are those which a central bank or government of a country takes to keep a control on demand and supply of money with an objective of attaining growth and stability of the economy.
Recently RBI the central Bank of India announced its monetary policies. Before going into the reasons and impacts of that, let us understand what policy rates are and what is the impact they can directly have on other rates like home loans, personal loans and lending rates…?
In simple words Policy rates are the monetary tools of RBI (Reserve Bank of India) which it use to control the money supply in the country, determining and maintaining day to day liquidity in the system and to determine other bank rates. Some of the key Policy rates are given below;
All the banks have to maintain a certain percentage of cash deposits with RBI that amount of funds are called Cash Reserve Ratio (CRR). Increase in the rate of CRR means Banks have to park more money with RBI and the funds available with banks will come down. RBI increases the rate to pull out excessive money from the banks and to maintain a balance.
This is the rate at which Banks borrows money from RBI. It’s the lending rate of the central bank. So if central bank increases the Repo rate it is not good news for banks as they have to borrow money at high cost. This compels banks to increase their lending rates as they get money at high rates.
Reverse Repo rate is the opposite of repo rate. It means the rate at which RBI borrows funds from the banks. If RBI increases this rate its good for the banks as they get higher returns by lending money to RBI.
So these are the basic policy rates which are very crucial not only for the economy but also for a common man because who is going to be effected ultimately.
Recently RBI has hiked CRR by 25 basis points, Repo rate by 25 basis points and Reversed Repo Rate also by 25 basis points. Due to this move by RBI 12500 crore of excess funds will be pulled out of the Economy. But this move has raised our eyebrows as on the one hand country is facing inflationatory pressure and on the other hand economic recovery is under way. So how effective is this move, we all have to wait and watch.
|Reverse Repo Rate||Repo Rate|