12.6            ndian    onom
     cent.5 A recent Amendment (2007) has removed                 in non-cash form prescribed by the government to
     the 3 per cent floor and provided a free hand to             be in the range of 25 to 40 per cent.10
     the RBI in fixing the CRR.                                         The ratio was cut to 25 per cent (done in
           At present (March 2018) it is 4 per cent and a         October 1997 after CFS suggestions).11 It used
     1 per cent change in it today affects the economy            to be as high as 38.5 per cent. The CFS has
     with Rs. 98,000 crore6—an increase sucks this                recommended the government not to use this
     amount from the economy, while a decrease                    money by handing G-Secs to the banks. In its
     injects this amount into the economy.                        place a market-based interest on it should be
           Following the recommendations of the                   paid by the government, it was being advised.
     Narasimham Committee on the Financial System                 However, there has been no follow up in this
     (1991) the government started two major changes              regard by the governments. The Government of
     concerning the CRR:                                          India has removed the 25 per cent floor for the
            (i) Reducing the CRR was set as the medium-           SLR by an Amendment (2007) providing the RBI
                  term objective and it was reduced               a free hand in fixing it—by March 2018 it was
                  gradually from its peak of 15 per cent in       19.5 per cent.
                  1992 to 4.5 per cent by June 2003.7
                                                                  bAnk rAte
                     After the RBI (Amendment) Act has
                  been enacted in June 2006, the RBI can          The interest rate which the RBI charges on its
                  now prescribe CRR for scheduled banks           long-term lendings is known as the Bank Rate.
                  without any floor or ceiling rate thereby       The clients who borrow through this route are
                  removing the statutory minimum CRR              the Government of India, state governments,
                  limit of 3 per cent.8                           banks, financial institutions, co-operative banks,
                                                                  NBFCs, etc. The rate has direct impact on long-
          (ii) Payment of interest by the RBI on the
                                                                  term lending activities of the concerned lending
                  CRR money to the scheduled banks
                                                                  bodies operating in the Indian financial system.
                  started in financial year 1999–2000 (in
                                                                  The rate was realigned12 with the MSF (Marginal
                  the wake of the banking slow down).
                                                                  Standing Facility) by the RBI in February 2012.
                  Though the RBI discontinued interest
                                                                  By March 2018, it was 6.25 per cent.
                  payments from mid-2007.9
                                                                  rePo rAte
     slr
                                                                  The rate of interest the RBI charges from its clients
     The statutory liquidity ratio (SLR) is the ratio
                                                                  on their short-term borrowing is the repo rate in
     (fixed by the RBI) of the total deposits of a bank
                                                                  India.13 Basically, this is an abbreviated form of
     which is to be maintained by the bank with itself
                                                                  the ‘rate of repurchase’ and in western economies
        5.     RBI Act, 1934, sub-section (1) of Section 42.      it is known as the ‘rate of discount’.14
        6.     Reserve Bank of India, Financial Stability Report,
               Government of India, New Delhi, 2017.                10.   RBI Act, 1934 and Banking Regulation Act, 1949
                                                                          Section 24.
        7.     Reserve Bank of India, Economic Survey, 2006–07,
               (New Delhi: Government of India, 2007).              11.   Committee on Financial System (CFS) headed by the
                                                                          then RBI Deputy Governor M. Narasimhan, 1991.
         8.    RBI (Amendment) Act, 2006, (Mumbai: Government
               of India, 2007).                                     12.   Through an RBI announcement on 15th February. 2012.
         9.    Reserve Bank of India, Credit and Monetary Policy,   13.   RBI Act, 1934 and Banking Regulation Act, 1949.
               (Mumbai: Government of India, 2015).                 14.   Stiglitz and Walsh, Economics, pp. 629–30.