Simplifying Impact of CRR/ SLR/ Repo/ Reverse Repo on Inflation and Interest rates:
SLR and Cash reserve ratio is maintained for bank solvency and Higher ratio of SLR and CRR makes bank relatively safe as higher ratio means they have more of their funds deposited in liquid securities and can fulfill the demand on redemption of deposit from the Bank.lets take an example :suppose a Bank has taken a deposit of 100 from public and CRR is 5 and SLR is 24 then available funds to lend from deposits with the bank will be 100-5-24=71 so their is direct relation between CRR ,SLR and Funds available with bank to lend to public out of deposit received from public.
Impact on Interest rates of this ratios:
Now take point what will be the impact on Interest rates of this ratios: Interest rate are fixed on the Demand supply situation of the amount available with person who want to lend and and person who want to borrow and interest rate is fixed on demand supply of the funds if demand is more and supply is less then interest rate rises up and if demand is less and supply is excessive then interest rate comes down .this relation is based on many assumption as said above.
So RBI is controlling the supply side of the Funds and by changes in CRR and SLR, Bank control the supply side of the money. so when RBI increase these ratio then available funds with the banks will go down and as demand remain the same then people will have to pay more as interest and interest rate will go up.On the reverse if RBI reduce these rates ,then amount available with bank for lending will be increased and they have to reduce rates to lend more. In these situation bank also reduce the rate of short term deposit from public as they have surplus money already to lend. so these rates have double impact the first direct effect is ,bank reduce rate of lending so more money is available with people and second is interest on Deposit will be reduced so more money will be available with the people.
But other side of interest rate i.e demand/off take of loan is also important to set the interest rate .This may be some time region wise and seasonal or other factor also effect the decision of Interest rate .
Impact on inflation
As from the above para we have understood that how these ratio reduce or increase the money supply in the system and we know if more person is demanding few goods then price of goods tends to increase and its called inflation so when RBI reduce these ratios then money supply in market increases and inflation is rises further but in present case this is not the correct and right relation. The Increase in CRR will squeeze 36000 crore from market ,so less money will chase few things means less demand so it will reduce Inflation.
At the time of depression the reduction of these ratio is to maintain liquidity without disturbing inflation much. while marked is falling and each and every commodity rate going downwards. In these situation after increasing of money supply inflation rate does not goes up as the demand is slow and reduction in commodity prices will nullify the impact of increase in money supply and have less inflationary effects.
But some times in few cases Inflation is due to supply side ,like in case of pulses and sugar the demand is some what the same but production has been reduced and rate has been doubled .In these types of cases Ever Increase in CRR will not have much impact as the problem is from supply side .
Impact of crises on exchange rate:
please note that this explanation is based on many assumptions,
Dollar rate is fixed by demand and supply position of dollar so if there is less supply and more demand of dollar then dollar-rupee exchange rate will go up means dollar value will increase. In present scenario dollar has risen up not the rupee has gone down means the issue is related to more to dollar and less to rupee. More over dollar exchange rates has risen up with all major currencies of the world so as ruppe.