8/7/2019 genral terms of economicz

1/3

General terms use(yeh purr lee very imp and basic of economy}

1cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes. The cash reserve

ratio is also known as the cash asset ratio or liquidity ratio. In the United States, the Board of Governors

of the Federal Reserve System requires zero percent (0%) fractional reserves from depository

institutions having net transactions accounts of up to $9.3 million.[1]

Depository institutions having over$9.3 million, and up to $43.9 million in net transaction accounts must have fractional reserves totaling

three percent (3%) of that amount.[1]

Finally, depository institutions having over $43.9 million in net

transaction accounts must have fractional reserves totaling ten percent (10%) of that amount.[1]

However, under current policy, these numbers do not apply to time deposits from domestic

corporations, or deposits from foreign corporations or governments, called "nonpersonal time deposits"

and "eurocurrency liabilities," respectively. For these account classes, the fractional reserve requirement

is zero percent (0%) regardless of net account value.[1

Prime rate, or Prime Lending Rate, is a term applied in many countries to a reference interest rate used

by banks. The term originally indicated the rate of interest at which banks lent to favored customers,

i.e., those with high credibility, though this is no longer always the case. Some variable interest rates

may be expressed as a percentage above or below prime rate

Repo rate in India

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is therate 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 moreexpensive.

[3]Repo comes from the repurchasing agreement

Statutory Liquidity Ratio (SLR) is a term used in the regulation ofbanking in India. It is theamount which a bank has to maintain in the form:

1. Cash2. Gold valued at a price not exceeding the current market price,3. Unencumbered approved securities (G Secs or Gilts come under this) valued at a price as

specified by the RBI from time to time.

The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the

liabilities of the bank which are payable on demand anytime, and those liabilities which areaccruing in one months time due to maturity) of a bank. This percentage is fixed by the Reserve

Bank of India. The maximum and minimum limits for the SLR are 40% and 25% respectively.[1]

Following the amendment of the Banking regulation Act(1949) in January 2007, the floor rate of

25% for SLR was removed. Presently the SLR is 24% with effect from 8 November, 2008.

The objectives of SLR are:

8/7/2019 genral terms of economicz

2/3

1. To restrict the expansion of bank credit.2. To augment the investment of the banks in Government securities.3. To ensure solvency of banks. A reduction of SLR rates looks eminent to support the

credit growth in India.

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing itrespectively. This counter acts by decreasing or increasing the money supply in the systemrespectively. Indian banks holdings of government securities (Government securities) are now

close to the statutory minimum that banks are required to hold to comply with existingregulation. When measured in rupees, such holdings decreased for the first time in a little less

than 40 years (since the nationalisation of banks in 1969) in 2005-06.

While the recent credit boom is a key driver of the decline in banks portfolios of G-Sec, otherfactors have played an important role recently.

These include:

1. Interest rate increases.2. Changes in the prudential regulation of banks investments in G-Sec.

Most G-Sec held by banks are long-term fixed-rate bonds, which are sensitive to changes in

interest rates. Increasing interest rates have eroded banks income from trading in G-Sec.

Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around

108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. Thiswas to increase lending by the banks to the corporates and resolve liquidity crisis. Providing

economy with the much needed fuel of liquidity to maintain the pace of growth rate. However

the exercise became futile with banks being over cautious of lending in highly shaky marketconditions. Banks invested almost 70% of this money to rather safe Govt securities than lendingit to corporates.

What SLR does is it restricts the banks leverage in pumping more money into the economy. Onthe other hand, CRR, or cash reserve ratio, is the portion of deposits that the banks have to

maintain with the RBI. Higher the ratio, the lower is the amount that banks will be able to use forlending and investment.

The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, where as SLR ismaintained in liquid form with banks themselves.

8/7/2019 genral terms of economicz

3/3

In 2007-08, the Indian rupee appreciated to around Rs.39 against the US dollar, and again plummeted to

around RS.50 by October 2009. What is the impact of the fluctuation in the rupee-dollar exchange rate

on Indian industry? Give your answer with special emphasis on the export sector and IT/ITES companies.

What can companies do to protect their interests in this volatile exchange rate environment? Also,

explain the impact of the rupee-dollar exchange rate on inflation, economic growth, and

competitiveness of Indian industry