QA Series No 24 - Different Rates of RBI

 

The Banking Tutor

Question Answer Series 2025

S No 24                                                                    17-07-2025

Different Rates of RBI 

01. What is Bank Rate ? 

The rate at which the RBI lends money to commercial banks without any collateral is called Bank Rate. 

02.  What is LAF ? 

The Liquidity Adjustment Facility (LAF) is a monetary policy tool used by the Reserve Bank of India (RBI) to manage short-term liquidity and interest rates in the Indian banking system. It allows banks to borrow from or lend to the RBI through repurchase agreements (repos) and reverse repos, respectively. 

03. What is Repo transaction ? 

RBI uses Repo Transactions  as a tool to manage liquidity and influence interest rates in the economy. Specifically, the RBI uses Repos to inject liquidity into the system by buying securities from banks with a simultaneous agreement to sell them back at a later date. This action lowers short-term interest rates and increases the money supply. 

04. What is Repo Rate ? 

The rate at which the RBI lends money to commercial banks, usually against the collateral of government securities is called Repo Rate.

05. What is the full form of Repo in Repo Transaction/Rate ? 

Repo stands for Repurchase. 

06. What is Reverse Repo Transaction ? 

Reverse repo transaction with the RBI is when commercial banks lend money to the RBI, essentially parking their excess funds with RBI  for a short period, and earning interest on it. This is the opposite of a regular repo transaction, where the RBI lends money to banks. 

07. What is meant by Reverse Repo Rate ? 

The rate at which the RBI borrows money from commercial banks is called Reverse Repo Rate. 

08. What is MSF ? 

MSF stands for Marginal Standing Facility. MSF is a monetary policy tool provided by the Reserve Bank of India (RBI). 

It allows commercial banks to borrow overnight funds from the RBI at a higher interest rate than the repo rate. 

This helps banks manage short-term liquidity crunches. 

09. What is meant by MSF Rate ? 

The rate at which banks can borrow money from the RBI against government securities over and above the amount available to them through the repo window. 

10. What is SDF ? 

The Standing Deposit Facility (SDF) is a liquidity management tool used by RBI to absorb excess liquidity from commercial banks without requiring collateral. It allows banks to deposit their surplus funds with the RBI overnight, and the SDF rate is a key policy rate influencing interest rates. 

11. What is meant by SDF Rate ? 

The Standing Deposit Facility (SDF) rate is the interest rate at which the Reserve Bank of India (RBI) accepts uncollateralized deposits from banks on an overnight basis. 

12. What is LAF Corridor ? 

The LAF (Liquidity Adjustment Facility) corridor refers to the range within which the RBI manages the liquidity in the banking system. The corridor is defined by the difference between the repo rate (the rate at which the RBI lends to banks) and the reverse repo rate (the rate at which the RBI borrows from banks). 

13. What is CRR ? 

CRR, or Cash Reserve Ratio, is a percentage of a bank's total deposits that they are required to keep as reserves with RBI. The RBI uses CRR as a monetary policy tool to manage liquidity and maintain stability in the banking system. 

14. Which Act authorise RBI to impose CRR? 

The Reserve Bank of India Act, 1934 authorizes the Reserve Bank of India (RBI) to impose the Cash Reserve Ratio (CRR). Specifically, Section 42(1) of the Act empowers the RBI to prescribe the CRR for scheduled banks.

15. What is the ceiling and floor rates of CRR ? 

Section 42(1) of the RBI Act allows the RBI to set the CRR without any floor or ceiling rate, having regard to the needs of securing monetary stability in the country. 

16. What is SLR ? 

In the context of RBI, SLR stands for Statutory Liquidity Ratio. It's a mandatory requirement for commercial banks to maintain a specific percentage of their deposits in liquid assets like cash, gold, or government securities. 

17. Which Act authorise RBI to impose SLR? 

Section 24 of the Banking Regulation Act, 1949: outlines the specific provisions related to the SLR. 

Section 56: extends the applicability of the Banking Regulation Act to cooperative banks. 

18. What is the maximum Rate of SLR that RBI can impose ? 

There is no statutory minimum limit for SLR in India. The maximum limit for SLR in India is 40% of a bank's Net Demand and Time Liabilities (NDTL), according to the Banking Regulation Act. 

19. What are SLR Securities ? 

Most Liquid assets like cash, gold, or government securities are known as SLR securities. SLR securities refer to the types of liquid assets that commercial banks are mandated to hold as reserves under the Statutory Liquidity Ratio (SLR) framework.

20. What is Base Rate ? 

The base rate, set by the Reserve Bank of India (RBI), represents the minimum interest rate that banks can offer on loans. 

21. What is BPLR ? 

BPLR, or Benchmark Prime Lending Rate, is a reference interest rate that was previously used by banks in India to determine the interest rates on loans. It was introduced by the Reserve Bank of India (RBI) in 2003 and was replaced by the Base Rate system in 2010. 

22. What is MCLR ? 

MCLR, or Marginal Cost of Funds-based Lending Rate, is the minimum interest rate that banks use as a benchmark for determining the interest rate on loans. It replaced the base rate system in 2016 and is designed to make loan interest rates more transparent and responsive to changes in the economy, particularly the repo rate. 

23. What is EBLR ? 

In banking, EBLR stands for External Benchmark Lending Rate. It's a system where banks set interest rates for loans (like home loans, MSME loans, etc.) based on an external benchmark rate, rather than an internal one. This ensures that interest rate changes are passed on to borrowers more quickly and transparently. 

24.  What is RLLR ? 

RLLR stands for Repo Linked Lending Rate. It is a type of interest rate for loans, particularly home loans, that is directly linked to the repo rate set by the Reserve Bank of India (RBI). When the RBI changes the repo rate, the RLLR, and consequently the interest rates on loans linked to it, will also adjust accordingly. 

25. What is DIR or DRI (Scheme) ? 

The Differential Rate of Interest (DRI) scheme, is a social welfare program in India designed to provide financial assistance to the poorest sections of society at a highly concessional interest rate of 4% per annum. This scheme aims to enable these individuals to engage in productive and gainful economic activities. 

26. What is the relation between MSF Rate  and Repo Rate ? 

The MSF rate is typically 0.25% higher than the Repo Rate, making it a more expensive borrowing option and discouraging its frequent use. 

27. What is the relation between Repo Rate and Reverse Repo Rate ? 

The Repo Rate is typically higher than the Reverse Repo Rate. 

28. What is the relation between Bank Rate and Repo Rate ? 

The bank rate and repo rate are both interest rates set by RBI, but they differ in their purpose and application. 

The bank rate is the interest rate at which RBI lends money to commercial banks for the long term, often without requiring collateral.

The repo rate, on the other hand, is the rate at which RBI lends money to commercial banks for the short term, typically with government securities as collateral. 

The bank rate is generally higher than the repo rate due to the longer-term and unsecured nature of the loans. 

Next Issue  will be shared on 19^th   July 2025.

Sekhar Pariti

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