STRUCTURE OF INTEREST RATES IN INDIA BANK RATE Bank Rate is the rate at which central bank of the country

y (in India it is RBI) allows finance to commercial banks. It is a tool, which central bank uses for shortterm purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate.

In 1962 there was Chinese aggression that required more money to be diverted in war hence there was rise in inflation that lead to increase in Bank rate. In 1973 the OPEC crises lead to inflation that lead to increase in the bank rate. In 1964 there was heavy debt of IMF to be repaid.In

1965 we had Pakistan war hence we needed to spend more money on defence

It rose during 1991-the reforms period,1996 it fell due to LAF(Liberal Monetary Policy) adopted,In1998 the

Kargil War took place. It therafter remained constant CRR(CASH RESERVE RATIO)

Banks are required to maintain a percentage of their deposits as cash, and can use only the remaining amount for lending/investment. This minimum percentage which is determined by the central bank is known as Cash Reserve Ratio.

E.g.So if CRR is 6% then it means for every Rs. 100/- deposited in bank, it has to maintain a minimum of Rs. 6/- as cash. However banks do not keep this cash with them, but are required to deposit it with the central bank, so that it can help them with cash at the time of need.

The steeps that occurred in the above graph was due to 1962 Chinese Agrression,1971 Bangladesh War,1973OPEC crises

The reforms from 1990 led to increase in CRR. In 1996 Liberal Monetary Policy adopted for encouraging private sector,1998-Kargil war,2003-Ketan Parekh Scam,2008 Satyam Scam

SLR(STATUTORY LIQUID RATIO) Apart from keeping a portion of deposits with the RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio. E.g.If you deposit Rs. 100/- in bank, CRR being 6% and SLR being 8%, then bank can use 100-6-8= Rs. 84/- for giving loan or for investment purpose.

The SLR was stable till 1963.In 1964 India had IMF debt that led to inflation hence the steep.It Kept on increasing due to Bangladesh War 1971,72-74 the price situation worsened. The second oil shock in 1979 severely affected the economy of India with inflation rate around 9%. Three

major droughts took place in this decade in the years i.e. 1983,1984 and in 1986.

1996-Liberal monetary policy adopted for encouraging private sector, hence SLR reduced.It remained almost constant till 2010 as Government concentrated on Reporate

CALL MONEY RATE

Its the money used to finance short term needs and lend short term surpluses, ranging from overnight to maximum tenor of 14 days.

Overnight usually means 12:00 p.m. one day to 12:00 p.m. the next day. If the lending period is more than 24 hours then it is called as a notice money. Usually brokers and dealers borrow money from call money market to cover their customers margin accounts or finance their own inventory of securities. Banks act as both lenders and borrowers of this market.

There is large decline in the year 1993 due to Harshad Mehta scam so people loss interest in stock market which reflected in demand of call money rate. In the year 1995 the call money rate achieved its peak due to result of reforms and well being of economy..

 In the year 2003 also demand in call money rate due to Ketan Parekh scam. REPO RATE Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive (Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI)

To control the inflation government has to control the repo rate and reverse repo rate and generally both are controlled together. 2003 the reporate and reverse repo rate is very low due to control the inflation which

was 8.3 so to absorb the liquidity form the economy.

REVERSE REPO RATE Reverse repo rate is the rate of interest at which the central bank borrows funds from other banks for a short duration. The banks deposit their short term excess funds with the central bank and earn interest on it. Reverse Repo Rate is used by the central bank to absorb liquidity from the economy. When it feels that there is too much money floating in the market, it increases the reverse repo rate, meaning that the central bank will pay a higher rate of interest to the banks for depositing money with it.

 (Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks)

PLR The prime lending rate is what banks charge their best customers. It is based on the RBI rate It is important because it affects liquidity in the financial markets. A low rate increases liquidity by making loans less expensive, therefore easier to get. When prime lending rates are low, businesses expand and so does the economy. Similarly, when the prime lending rate is high, then liquidity dries up, and the economy will start to slow. For this reason, banks will usually only raise the prime lending rate when the RBI rate is increased. This is true even though banks would technically make more on an

individual loan when rates are higher. However, since this would decrease the number of loans applied for, this would slow the loan business overall.

PLR is controlled by Reserve bank of India to control FDI flow and inflation and bank rete

PLR is reach at peak after 1990 due RBI have increased bank rate to control the liquidity of Economy.

CONCLUSION Interest rates are used as tools to control the inflation in the country Inflation rate and Interest rate go hand in hand Tight monetary policy to reduce money supply and vice versa