Terms For Today: Repo Rate, CRR, Inflation

We saw in the previous post that inflation is down as RBI mulls over further reduction in repo rate and CRR. So let's understand what they mean.

Repo Rate

A Repurchase Agreement (or repo) allows a borrower to use a financial security as guarantee for cash loan at a fixed rate of interest. A repo is equivalent to a cash transaction combined with a forward contract, as the borrower has to later buy back the security from the lender at a fixed price.

In the Indian context, repo rate is the rate at which banks borrow money from Reserve Bank of India (RBI).

Reverse repo is the rate at which RBI borrows money from banks.

CRR or Cash Reserve Ratio is a bank regulation which defines the amount of funds that the banks have to keep with the RBI (for India; a central bank otherwise). An increase of the CRR implies that the banks have less money available.

Statutory Liquidity Ratio (SLR) is the amount a commercial bank has to maintain, before it can provide credit to its customers. SLR is also determined and maintained by RBI to keep tabs on expansion of bank credit.

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation occurs when there are less goods (supply) and more buyers (demand), resulting in an increase in the price. Well, I'm sure we all learnt that in school, but it was important here as bank interest rates are connected to inflation.

Weekend Scoop : Satyam Chairman's Shares Mortgaged, Inflation Going Down, RPL Gains

The sensex was obviously closed over the weekend, so we'll just look at some of the financial effects of events earlier in the week.

The Satyam fiasco keeps getting gloomier; apparently Ramalinga Raju had mortgaged his shares (he and his family hold about 8.61% stake in the company) to institutional lenders, who might have sold them already. This has put added pressure on the board of directors, who were already under duress after academician Mangalam Srinivasan, an independent board member, had resigned on Dec 25.

Inflation is down to 6.61%; and with news of a possible reduction in repo rates, reverse repo rates and the CRR by RBI, experts predict that inflation can reach as low as 2% in March next year.

I had mentioned RIL's new venture in Jamnagar - Reliance Petroleum Limited (RPL) gained over 6 percent a day after the refinery started. Although Mukesh Ambani had to deal with the Petroleum Ministy's decision to turn down RPL's request to export LPG, citing that the country still has LPG deficit.

Also, business magnate Vijay Mallya announced that with approximately 500 crores turnover in December, Kingfisher airlines will break-even the losses it had sustained earlier.