Key Monetary Policy Terms That Every Investor Should Know - Part 2
In the previous article, we learned about 4 key monetary policy terms like LAF, CRR, Repo rate and reverse repo rate. Here are a few more important terms that you should know to understand MPC policies. Want to track your trades and investments smoothly? Then Zebu’s online trading platform is the answer to it. As the best Indian stock broker company we not only have the best technology but also have the lowest brokerage for intraday trading. 5. Statutory Liquidity Ratio (SLR) The statutory liquidity ratio is the amount of money that banks must keep in liquid assets at all times. But banks can't keep these funds in cash. Instead, they need to keep them in government securities, bonds, or precious metals. The CRR and the SLR both affect how much money commercial banks can lend to people who want to borrow it. If the RBI keeps these two rates too high for too long, banks will be less likely to lend money. It would be hard for people who want to borrow money and are in this situation. 6. Base Rate This is the lowest interest rate that a bank will charge a customer when they lend them money. It is up to the bank's management, and RBI has no say in the matter. But banks don't usually lend money at that interest rate to people who want to borrow money. When lending money, banks usually charge an extra amount on top of this base rate. 7. Long-Term Repo Operations (LTRO) In 2020, RBI took a revolutionary step by putting the LTRO tool on the market to control the repo operations. In LTRO, RBI lends money to banks for a set period of time, usually between 1 and 3 years, at the current Repo Rate. In return, banks offer Government Securities with the same or longer maturity period. In 2019, RBI's six monetary policies have lowered rates by almost 135 basis points (bps), but banks haven't even given customers half of the benefit. In the LTRO system, the RBI thinks that giving banks stable, longer-term cash at the repo rate can help them lower the rates they charge for loans to consumers and businesses while keeping their margins. LTRO is used to add money to the market and make sure that credit keeps flowing to the economy. 8. Targeted Long-Term Repo Operations (TLTRO) This is the same as LTRO, but the main difference is that TLTRO uses the money borrowed from RBI to buy investment-grade corporate bonds, commercial paper, and non-convertible debentures. 9. Marginal Standing Facility (MSF) Marginal Standing Facility is a Liquidity Adjustment Facility (LAF) window that RBI opened in May 2011. It is the rate at which banks can borrow money from the RBI for one night in exchange for approved government securities. The question is: If banks can already borrow from the RBI through the Repo Rate, why do they need MSF? This window was made so that commercial banks could borrow money from the RBI in times of emergency, like when inter-bank liquidity runs out and overnight interest rates change a lot. So, the main goal of the MSF is to keep the overnight inter-bank rates from being too unstable. Now that you have a deep understanding of these MPC terms, the next time the RBI releases an update, you can see how the stock market is affected with some extra context. Zebu’s online trading platform is the answer to all your bad tech problems. As the best Indian stock broker company we not only have the best technology but also have the lowest brokerage for intraday trading.