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Some of these interest rates are set by the government in India. The RBI sets bank deposit and lending rates, as well as those of financial institutions, while the government sets rates on P.O. instruments, PSU bonds, and government securities in collaboration with the RBI.
Interest rates
The interest rate is a proportion of the principle, which is the amount borrowed, that a lender charges a borrower. An annual percentage rate (APR) is used to express the interest rate on a loan (APR).
Important things to know
The interest rate is the price that a bank charges a borrower for using assets in addition to the principal.
An interest rate also pertains to the money generated from a deposit account at a bank or credit union.
Simple interest is used for most loans. Compound interest, on the one side, is imposed on the principal as well as the interest earned from previous periods in some mortgages.
A lender will charge a reduced interest rate to a borrower who is considered low risk. A loan with a high-risk rating will have a higher rate of interest.
Types of Interest rates fixed by RBI
Repo rate: The repurchase rate, often known as the repo rate, is the interest rate at which the Reserve Bank of India loans money to commercial banks and other financial institutions in the nation. The current Repo Rate is 4.00 percent, as set by the RBI.
Reverse Repo Rate: Whenever the Reserve Bank of India is experiencing a financial crisis, it urges commercial banks and other financial institutions to deposit surplus cash in the RBI treasury and provides them high interest rates. Generally, the Reverse Repo Rate is less than that of the Repo Rate. The current rate is 3.35 percent.
MSF (Marginal Standing Tool Rate): MSF allows banks to borrow money from the RBI in exchange for government assets that have been authorised by the RBI. This option should only be used in emergency or catastrophic situations. Because banks want cash immediately, the MSF rate is always higher than the Repo Rate. The rate on the Marginal Standing Facility is presently 4.65%.
Bank rate: The Bank Rate is the interest rate charged by the Reserve Bank of India on loans made to commercial banks. In most cases, the bank rate is greater than the repo rate. In contrast to the repo rate, the bank rate has a direct impact on the end user, in this case the client, because high bank rates imply high lending rates. The current Bank Rate is 4.65 percent, which is the same as the Marginal Standing Facility rate.
Cash Reserve Ratio (CRR): It is a requirement in India for banks to keep a specific percentage of their deposits as liquid cash. Banks, on the other hand, prefer to deposit this liquid cash with the Reserve Bank of India, which is the same as having cash in their hands. The Cash Reserve Ratio is the proportion of deposits that banks should set aside. The Reserve Bank of India sets the CRR. The current CRR is 3% annually.
Statutory Liquidity Ratio (SLR): Banks are required to maintain a minimum ratio of their Time liabilities (when the bank must wait to redeem its liabilities) to Net Demand (when the bank can withdraw money from these accounts immediately) in the form of liquid assets such as gold, cash, and government securities at the end of each business day. The Statutory Liquidity Ratio, or SLR, is the ratio of temporal obligations to liquid assets in demand. The Reserve Bank of India can establish an SLR of up to 40% per annum. The current SLR, on the other hand, is fixed at 18.00 percent each annum.
Base rate: The Reserve Bank of India establishes a minimum rate below which Indian banks are prohibited from lending to their clients. In banking, this minimal rate is referred to as the Base Rate. It is the lowest interest rate that banks are allowed to charge their clients. The RBI has set a new Base Rate of 8.15 percent to 9.40 percent per annum.
MCLR (Marginal Cost of Funds-based Lending Rate): It is a new technique for commercial banks to calculate lending rates. The RBI’s current MCLR (overnight) rate is in the range of 7.10 percent to 7.75 percent.
Savings Deposit Rate: The savings deposit rate is the interest rate that an account holder earns on the money they keep in their savings account. The current Reserve Bank of India Savings Deposit Rate is between 2.75 and 3.50 percent.
Term Deposit Rate: Customers that put money into their account and agree to keep it fixed until a specific date are given a term deposit rate. Senior citizens often receive a 0.5 percent higher term deposit rate than other citizens. The Reserve Bank of India has established an interest rate for Term Deposits that ranges from 5.70 percent to 6.00 percent as of March 17, 2020.
Conclusion
The RBI’s responsibility might thus be to define a multi-layered regulatory and supervisory system that captures the sector’s heterogeneity and adopt policies that allow the sector to flourish without disrupting the rest of the economy.
