Every bank has the right to set the interest rates for the fixed deposits. This improves competition among the banks to attract customers. But RBI has the authority to control and monitor the limit of this interest rate.
RBI is the king of all banks
In our country Reserve Bank of India is the ruler of all Indian banks or we can say it is banker’s bank. RBI has the central monetary authority to maintain the price stability in the Indian economy. To have a stable and growing economy, RBI has the power to fix and change different interest rates in India as per the flow of funds.
Bird’s eye view for different interest rates:
Let’s have a look to the different interest rates meaning and its impact in Indian economy.
Cash reserve Ratio (CRR)
Sometimes, we wonder what happens to the money that we deposit in a particular bank. Actually, this is used by the banks to earn money by lending it for house loan, personal loan etc. But banks do not have the right to use the entire amount we deposit in banks. They have to maintain a portion of the deposit as cash and rest can be lent or invested by the banks. Now, the minimum percentage of cash deposit required to maintain is determined by the RBI, which is known as the CRR.
Statutory Liquidity Ratio (SLR)
After keeping a portion of deposits with RBI as cash, Banks also required to maintain a small portion of deposit with them at the end of the day. It may be in the form of Gold, cash, government bond or other security. This portion of deposit is called SLR.
Repo Rate
When banks have any shortage of fund they can borrow from central bank with less percentage and lend money to costumer with higher rate of interest to get profit out of it. The rate of interest at which RBI lends money to commercial bank is known as REPO RATE. If repo rate increased by RBI then, to make profit, banks also increase the rate of interest which discourages the customer to borrow money from bank, leading to a shortage of money in economy and less liquidity. That’s how it controls over the inflation.
Reverse Repo Rate
This rate is nothing but the interest percentage given by RBI to the commercial bank for the amount RBI borrowed from banks. Increase in this interest rate encourages the commercial bank to deposit more funds to central bank. Which ultimately results, money is drawn out of commercial banks and it controls over the inflation.
Rates that Influence interest rates
Fixed deposit rate are linked to the rate of inflation. It means when Indian economy is in high inflation, RBI adopts a tight monetary policy to regulate the credit available in our country. RBI hikes the repo rate in this situation.
To be safe and cash flow for long term, banks issue high interest rate for fixed deposit to attract various customers. At the other hand banks decrease the CRR. CRR cut brings more liquidity into the system and it has a long term impact on the interest rate on deposits.
That’s how repo rate and CRR have a great impact on the deposit rates and in the case of inflation.
As we see, all the interest rates are fully controlled by RBI. In case of increase in CRR and SLR, bank gets less power to lend loans. And increase of repo rate and reverse repo rate customer get less power to borrow the loan. That’s how the fund inflation is control by RBI in India.
