Bank Rates Effects and Affects on Common Man's Life
Before we discuss the effect of Bank Rates s on Common Man, we shall attempt, in brief to arrive at the factors responsible for different types of interest rates. These are mainly the interest rates offered by banks on savings deposits, fixed deposits, that is interest paid to depositors by banks, interest rates charged by the banks to the borrower customers on different types of loans and advances, the interest paid by Government on small savings like NSC, Post Office deposits, interest paid by government on their borrowings, interest paid by corporates on fixed deposits accepted from the shareholders and the public. The factors for this type of different interest rates are economy related and depends, among other things, the demand for money at a particular point of time or period, the level of government borrowings, the supply of money in the market circulation and last but not least the rate of inflation.
Let us analyze in brief the measures/policy adopted by Reserve Bank of India (RBI) and Government of India and how it affects or influence the interest rates in the banking system and to the ultimate consumer and common man. The main or base rate is the Bank Rate which means the rate at which RBI lends against eligible securities to eligible borrowers, banks and financial institutions. Bank rate is indicative of RBI's long term outlook on interest rates. The other rates in the economy move in tandem with the Bank Rate, including Repo, Reverse Repo. The difference in Bank Rate and Repo Rate is while the former is the rate at which RBI finances commercial banks in India through refinance to the extent of their eligibility. Repo Rate is a short term finance availed through purchase and sale of securities. other words banks borrow short term Funds from RBI against securities with an agreement to repurchase the underlying securities at a predetermined price and date. Repo is governed by Reserve Bank of India. The transactions are carried only at Mumbai Office of RBI.
Reverse Repo is just the opposite of Repo Rate in the sense that it is the rate at which RBI borrows funds from other banks in the short term. RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. A hike in the repo and reverse repo rate pushes up interest rates.
Depending on the liquidity position, banks borow or lend from the other banks according to their requirements on a regular basis.
The other measures affecting the liquidity of a bank is that banks have to maintain what is known as CRR and SLR with RBI. CRR known as Cash Reserve Ratio is the ratio of cash in relation to their net liabilities to the banking system to be kept with RBI. The objective of CRR is two fold – one to maintain a portion of the deposits in a risk free manner with RBI and other one being RBI's control on liquidity or the system, a measure towards inflationary control by RBI. SLR or what is known as Statutory Liquidity Ratio is the ratio in which banks have to invest a portion, as prescribed by RBI, of their deposits in government securities. This measure again restrict the bank's liquidity position. Now let us look at the various rates affecting the common man in our every day life over which they have no control. The present CRR is 6% and SLR is 25%.
Next we look at the Policy Rates, which are at present, as given below.These are the indicative Rates for the economy. Policy Rates
Bank Rate 6 Percent
Repo Rate 6 percent
Reverse Repo Rates 5 percent
Besides this, we have what is known as the Exchange Rates. The reference rate is fixed by RBI at 12 noon rates of a few select banks in Mumbai.
Exchange Rates (RBI Reference Rates)
INR/1 USD 45.0400
INR/1 Euro 60.6200
INR/100 Jap.Yen 53.4600
INR/1 Pound Sterling 71.2961
Base Rate 7.5% to 8.00%
Savings Bank Rates 3.5%
Deposit Rates 6.00% to 7.50%
The Savings Bank, which is the only regulated rate in the Banking Sector in India, regulated by RBI is at present 3.5%. However there is a move to deregulate the Savings Bank Rate.
Prime Rate or Prime Lending Rate which banks charge to customers with high credibility and A Class customers though banks in India have switched over to Base Rate system from Prime Lending Rate.. effective July 1, 2010. Banks are at liberty to choose any benchmark rate to arrive at the Base Rate and determine their actual lending rate on loans and advances including specific charges, if any based on it.
Having discussed the various rates any change by the RBI either in the Bank Rate, or Policy Rates, will affect the Banks interest rates on deposits and loans and advances. Banks in turn pass on these hike to its customers. That is why whenever there is a rate hike in loans including housing or other type of loans, it will affect the customers to the extent of hike. In case of inflationary times when funds become dearer and with frequent increase in Bank Lending Rates, the Equated Monthly Instalment or EMI goes up upsetting the budget of many.