KEY POLICY RATES:
The following rates are considered to be Key Policy Rates or signally rates
1. Bank Rate
2. Repo Rate
3. Reverse Repo Rate
4. Marginal Standing Facility(MSF)
5. Cash Reserve Ratio(CRR)
6. Statutory liquidity ratio (SLR).
All the above rates are decided by RBI. The following rates are fixed by banks themselves and are not considered to be key policy rates
1. Base Rate
2. Interest Rates on Saving Accounts
3. Interest Rates on Current Accounts
Bank Rate: RBI lends to the commercial banks through its discount window to help other banks meet depositors’ demands and reserve requirements. The interest rate that the RBI charges the banks for this is called bank rate. If the RBI wants to increase liquidity and money supply in the market, it will decrease the bank rate, and vice versa.
Repo Rate: Bank Rate and Repo Rate are two rates on which RBI lends to other Banks. However, the key difference is that Repo Rate is the rate at which RBI lends to banks for short periods. In Repo Rate, there is no direct lending but the lending is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate. If the RBI wants to make it more expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate
Reverse Repo Rate: Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term. Opposite to Repo, Reverse Repo is done by RBI selling government bonds to banks with the commitment to buy them back at a future date. The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn interest on it. RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.
Cash Reserve Ratio: Cash reserve Ratio (CRR) is the Cash that banks have to park with Reserve Bank. The objective of CRR is that it ensures that a portion of bank deposits are always available to meet withdrawal demand, and secondly, it enables that RBI control liquidity in the system. If RBI decides to increase the cash reserve ratio, the available amount with banks would reduce. The bank increases CRR to impound surplus liquidity.
Statutory Liquidity Ratio: While in CRR, the Banks have to park Cash with RBI, in SLR, they have to maintain a minimum percentage of deposits with themselves at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio.
Marginal Standing Facility: MSF was launched by Reserve Bank of India (RBI) from May 2011. It is another lending facility to the commercial banks whereby they can borrow up to 1 per cent of their net demand and time liabilities for a very short term such as overnight lending. Since this is a window to get quick funds from RBI, it is costlier than repo Rate. The rate of interest for the amount accessed through this facility is fixed at 100 basis points (i.e. 1 per cent) above the repo rate for all scheduled commercial banks. Please note that MSF is the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging through government securities, which has lower rate of interest in comparison with the MSF.
Payment And Settlement System in India
The Reserve Bank of India is the central bank of India, acts as a regulator of the financial system. In India, Payment and Settlement are regulated by ‘’The Payment and Settlement Systems Act, 2007’’ Which provides the authority to RBI for all payment and settlement related matters. This act also provides the legal basis for ‘netting’ and ‘settlement finality’.
Under this act two regulations have been made by RBI, One is, Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) 2008.This committee is formed by the central board of directors of RBI. It deals with exercising its powers, the constitution of subcommittees and advisory committees for payment and settlement related matters.
Another one is Payment and Settlement Systems Regulations, 2008. It deals the issues like the form of application for authorization for commencing on a payment system and grant of authorization, payment systems, furnishing of returns, documents, the furnishing of accounts and balance sheets by systems provider etc.
CCIL- Clearing Corporation of India Limited –
- It is an agency which will extend guaranteed settlement for trades done or reported on NDS in government securities including Treasury Bills.
- This is used to remove the effect of credit risk faced by the members who buy securities and sell securities.
- CCIL provides the additional comfort of improved risk management practices through daily marking to market of collateral, maintenance of daily margins by members and through a guarantee fund.
- Settlement through CCIL will be done on Delivery Versus Payment II (DVP II) mechanism. It refers to the settlement of securities on the gross basis while funds will settle on the net basis.
NEFT –National Electronic Funds Transfer –
- It facilitates, funds can be transferred electronically from any bank branch to another having an account with any other bank branch in the country.
- It operates in hourly batches that mean funds transferred in hourly batches – there is eleven settlement from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays.
- There is no minimum or maximum on a number of funds that could be transferred using NEFT.
- IFSC –Indian financial system codeis an alphanumeric code that uniquely identifies a bank-branch participating in the NEFT system to route the messages to the destination bank or branch.
- 11 digit codes with first 4 alpha characters representing the bank and the last 6 numeric characters represent the branch.The 5th character is 0.
RTGS – Real Time Gross Settlement –
- It facilitates fund transfer from one bank to another on real time and on the gross basis.
- Without bunching with any other transactions, this fund transfer facilitates one to one basis without any waiting period.
- This is the fastest possible money transfer system and this system is meant for large value transactions. The minimum amount to be remitted through RTGS is 2 lakh. There is no upper limit for RTGS transactions.
- Fund transactions available from 9.00 hours to 16.30 hours on weekdays and from 9.00 hours to 13.30 hours on Saturdays for settlement.
EFT –Electronic Funds Transfer –
- By this money can transfer from account to account of any bank branch to any other bank branch in places where EFT services are offered.
- EFT system presently covers all the branches of the public sector banks and scheduled commercial banks.
HVC- High-Value Clearing-
- To facilitate faster clearing of large value cheques (of the value of rupees one lakh and above) RBI introduce HVC, covering selective branches of banks for same day settlement.
CTS- Cheque Truncation System-
- It is a Cheque clearing system. Clearinghouse sends the electronic image of the cheque and related information to the paying branch to eliminate the flow of physical cheque. It speeds up the process of collection of cheques.
- It provides more secure transactions.
- Reduces the scope for clearing related frauds or loss of instruments in transit.
- Lowers the cost of collection of cheques.
- Removes the reconciliation related and logistics-related problems thus benefiting the system as the whole.
ECS – Electronic clearing Service –
- This uses a series of electronic payment instructions for transfer of funds instead of paper instruments.
- ECS-Credit – This enables companies to pay interest or dividend to a large number of beneficiaries by the direct credit of the amount to their bank accounts.
- ECS- Debit – This facilitates payment of charges to utility services such as loan instalments, electricity bill and payment of insurance premium, directly by debit to the customer’s account with a bank.
NECS-National Electronic Clearing Service –
- It facilitates credits to bank accounts of multiple customers against a single debit of remitter’s account.
- NECS (Debit) – launched to facilitate multiple debts to destination account holders against a single credit to the sponsor bank.
- The system has a pan India characteristic leveraging on CBS of member banks, facilitates all CBS bank branches to participate in the system.
NPCI -National Payment Corporation of India –
- The objective of this newly established company promoted by banks in India is to build robust and state of the art national level retail electronic payment system infrastructure in the country.
- NPCI was incorporated in December 2008 and the certificate of commencement of business was issued in April 2009.