RBI monetary policy

RBI monetary policy is reviewed quarterly and the policy is spelled out which modifies the key interest rates.
Following are the key rates definition.

CRR (cash reserve ratio)
Its the reserve amount bank has to keep with RBI.
If CRR is hiked then bank has to keep more money with RBI. Due to this RBI sucks out extra liquidity out of the financial system.
If CRR is reduced then bank has to keep less money with RBI. Due to this bank will have more lending power thereby increasing the liquidity in the financial system.

RR (Repo rate)
Whenever the bank faces shortage of funds it can borrow from RBI. RR is the rate at which bank borrows money from RBI.
If its hiked then bank has to pay more money on borrowed money from RBI. The bank might pass the burden to the customer.


RRR (Reverse Repo rate)
Similarly RBI might need money !. During such scenarios RBI itself borrows money from the banks.
Therefore RRR is the rate at which RBI borrows money from the bank. Banks will be obviously happy to lend the money to RBI since it will be in safe hands.

SLR (Statutory Liquid rate)
Its the minimum amount of money the bank needs to park into Govt bonds,gold etc before providing credit to the customer. They can even hold in the form of cash.
The main difference between SLR and CRR is that in CRR the bank parks its money in RBI whereas in SLR it parks money in the markets.

Bank Interest rate
Its the rate at which RBI lends money to the bank. Depending on this bank will lend money to the customers keeping the banks profit in mind.
For customers like us hike in interest rate means hike in deposit rates and also hike in EMI !. Similarly lower interest rates means lower deposit rates and lower EMI propelling the customer
to take loans and thereby fueling the economy.

Inflation
Its a generic term to measure the cost price of food and goods in the country.Higher inflation rates means you need to pump in extra money for the same 1 kilo of sugar thereby bleeding your purse. Normally RBI in turn hikes the interest rate so that value for money is retained. But due to this growth will be affected due to higher rates.
Therefore RBI policy needs to look into inflation vs growth aspect before changing the policy . Its indeed a tough job for RBI Governor.

The rate sensitive sectors are normally affected by RBI policy. Sectors are Real estate, Auto, and obviously Banking.
If rates are cut then loans will be cheaper and customers will be more interested in buying lands and vehicles. Similarly when rates are hiked loans becomes dearer.
If rates are cut then depositing money in banks will not be attractive enough and money will be pumped into stock markets.
Normally the markets are smart enough to factor in the possible rate cut or hike even before the policy is announced.
Therefore when the policy is announced market doesn't react as expected since it has been factored already. But if the policy is full of surprises then the market will move up or down drastically. Many traders speculate in this period whereas long term investors review the policy and if need modify their portfolios.