post 6
Dated7/5/2020
Terms and Ratios
snippet In this post we will discuss some important terms to be used in future for understanding Monetry Policy

Let’s start with a Bank’s statement and analyze it
A bank as Liabilities (Money that bank has to give to others) defined as

  1. Time Liabilities
    i). The money that people have deposited for a fixed time Example : Fixed deposits(FD), Reccuring deposit(RD)
    ii). In 2015 Govt. has approved an Unbreakable FD with higher interest rates
  2. Demand Liabilities
    i). The amount in bank accounts that can anytime be withdrawn by a account holder
    ii). Unclaimed Deposits
    iii).Overdue balance
  3. Other i) Interest to be paid on deposits ii) Unpaid dividents

so the above two are collectively called as Net demand and time liabilities we’ll refer these as NDTL

now a part of this NDTL is required to be kept as a cash reserve called CRR cash reserve ratio which is generally about 4%-6%
this ratio ensure that there is plenty of cash with bank to operate
there is another part of this NDTL which has to be invested in liquid assets (investments that can be sold easily to get cash Eg Gold). This part is called SLR or Satutory Liquidity Ratio currently it is around 18%
SLR - covers some liquid asstes like
T-Bills (treasury bills), Gold,Bonds, Government securities.
A Quick note out of flow.
When Government needs money it releases some bonds or securites as called, These are like Fixed deposites but here Government agrees to give definite interest, And these are released by RBI.


But How do RBI check CRR and SLR:: RBI maintains a policy of fortnightly lag where the CRR and SLR should be ,maintained over averaged over a period of 15 days.

But why do RBI has such strict norms in maintaining NDTL because in previous post we’ve seen that the prices are controlled by Supply and Demand match. Now RBI can not regulate much in suppply, whereas it can regulate Demand by controlling NDTL how?? let’s see

If we carefully see a Bank’s book it earns profit through loans because Bank gets deposits on which it pays us some interest but it gives a part of our money as loan at a much higher interest rate and the profit of bank is derived from the difference in interest of Loan and Deposits. This margin is called SPREAD in terminology.

So controlling a Bank’s NDTL is controlling its ability to give loans because if Reserve ratios are high then bank has comparatively less money to dispense as loans. This indeed makes Banks to GO for a High spread hence loans get expensive and people spend less in market ultimately Lowering the demand Hence We can clearly reason out the fact that if there is high liquidity in market then RBI raises Reserve ratios to avoid uncontrolled inflation, Whereas if there is shortage if cash in market then RBI can dispense more money in the market to controll deflation. SO it is the crucial role of RBI to maintain a healthy market using The Tools of Monetry Policy.


the reverse path is also true where Reserve ratios are lowered and demand in market is raised to match the corresponding supply of the time….
There is another term called Liquidity adjustment facility (LAF) or Repo Rate this is the rate at which bank lends money to banks in case of short term loans, and at reverse repo rate RBI takes deposits from banks

hence next time RBI announces its monetry policy You will see it with a different view instead of a boring or useless piece of news

The Policy Rates Can be Checked at the Official site with the following link
Policy rates RBI