NCERT Class 10 Economics Chapter 3: Money & Credit Complete Notes Part 4

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Money & Credit

Image shows the Reverse Repo Rate and Call Money Rate

Image Shows the Reverse Repo Rate and Call Money Rate

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Now when we are talking about bank they are some terms in credit that are indispensable. Now first one is let’s understand basic difference between the terms that you have frequently, repo rate, reverse repo rate, cash reserves and SLR and so on. Let’s talk about one by one.

When RBI lends money to the bank that is known as repo rate and it is call at a repo rate when it is in short term. RBI lend money for long duration at bank rate. The next things to understand sometimes RBI borrows money from the bank and that money RBI is borrowing from the bank is known as reverse repo rate.

Now next is MSF that is Marginal Standing Facility that explains that RBI is lending money to the bank in cases of acute of shortage either due to some kind of emergency situations that need to be fulfilled. The bank takes the MSF and the rate of MSF is much higher as compared to the repo rate because the bank is in acute need for the money, so RBI does provide the bank with the money only in case of acute shortage.

The next is sometime bank provides money to the brokers and this brokers further provides money to the lenders or the borrowers, so rather than directly providing money to the borrowers there is kind of intermediate stage where you have bank providing money to the broker and broker providing that to the borrower, when bank is providing money to the brokers it is known as call money rate.

Image shows the Cash Reverse Ratio and Statutory Liquidity R …

Image Shows the Cash Reverse Ratio and Statutory Liquidity R …

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Now next is what is different between CRR and SLR, cash reserve ratio is the ratio that bank holds or deposit cash with the RBI. So let’s say I have earned or bank has earned 100Rs. and the CRR is a rate of 9% so that means of the 100Rs. What would be deposited with RBI is 9 Rs. So the 91Rs. bank can use to lend the money from borrower or other brokers. That money is used by bank to lend would be only 91Rs. So that the first thing that is cash reserve ratio.

The next is Statutory Liquidity Ratio, we also call it SLR. SLR is the main part of NDTL, NDTL talk about net deposits and time liabilities, we see in a minute how it’s works and when we try to maintain the part of NDTL. It try to maintain the liquid assets in the form of the either Gold cash or some kind of proof security. What is NDTL? ND means Net Deposit and the TL means Time Liabilities. So when I say net deposit it’s in the form of savings or current account where whatever I have in bank I can withdraw that anytime. When it’s come to time Liabilities of fixed deposit. If SLR is higher that means it restrict bank to pumping money in to the economy.

Image shows the about some Rate

Image Shows the About Some Rate

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Now in simple terms, if I want to talk I can say CRR, SLR, repo rates are cut down what would happen? Deposit rates, lending rates and loan rates may fall as a result there would be rise in money supply, there would be more growth and there would be higher liquidity and more purchasing power that would come up.