Repo Rate Meaning, Reserve Meaning, What is OMO - Definition

[Repo Rate Meaning, Bank Rate, OMO, Reserves, CRR, SLR]

Banks Rate or Repo Rate is:

It is the rate at which the central bank gives credit to the commercial banks. Increase in bank rate increases the interest rate and demand for credit reduction. When the credit is given in the form of gvt securities the rate is called repo rate.

When the central bank increases bank rate or repo rate, commercial banks also have to increase interest rate. This will slow down the money flow. When the central bank decreases bank rate, commercial bank also can reduce the rate. This will increase money flow in the financial market.

What is OMO (Open Market Operation):

It affects the quantity of money in circulation by buying or selling government securities. When it buys Government securities which is owned by private sector or individuals, it floods financial markets with money. This technique tend to fail when the money isn't growing. The central bank sells Government securities to take money out of the system.

For Example:
"A" is a country with small population. This country has recently found over 30 oil field. People has purchased share of new oil companies. The company has make make huge profit and distributed dividends among the shareholders. Everyone has more money than they need. Banks have surplus amount of liquidity. They don't need more deposit. So the government has decided to take money out of the market. The central bank starts selling its government securities. The people purchased the securities. They are not getting those securities for free. They pay money for it. So the government is successfully taking money from people. After a year the oil price crashed. The companies couldn't distribute dividends. The people need money. The government has great amount of cash in their hand. The Central Bank purchased the securities from the people to supply them money.

Reserve Meaning, Minimum Reserve System: 

Reserve means the amount of money that the bank can't invest for the safety of their stakeholders if any payment crisis arises. These reserves ensure that the banks have enough money to support them at any crisis moment. The central Bank sets the ratio of minimum reserve with the commercial banks reserve such as SLR and CRR.

• CRR (Cash Reserve Ratio): 

Percentage of money which the bank has to keep on the difference of time and demand liabilities ( For depositors demand and time or term deposits) in the form of cash maintained in central bank. It controls excess money flow in the economy.

• SLR (Statutory liquidity ratio):

Percentage of money which the bank has to keep on the difference of time and demand liabilities ( For depositors demand and time or term deposits) in the form of liquid asset such as gold, cash and other securities maintained in bank. Bank can earn money from it. It helps in meeting out the unexpected demand of any depositor.

So, these are the tools of central banks for implementing monetary policies.

End.