Rule of 72

Rule:

“In wanting to know for any percentage, in how many years the capital will be doubled, you bring to mind the rule of 72, which you always divide by the interest, and the result is in how many years it will be doubled. Example: When the interest is 6 percent per year, I say that one divides 72 by 6; obtaining 12, and in 12 years the capital will be doubled.”

 

In finance, the rule of 72, the rule of 70 and the rule of 69 are methods for estimating an investment's doubling time. The number in the title is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. Although scientific calculators and spreadsheet programs have functions to find the accurate doubling time, the rules are useful for mental calculations and when only a basic calculator is available.

understanding signals from RBI credit policy

Every quarter, newspapers and business channels dedicates a lot of space to credit policies by RBI. There are 3 important ratios (CRR, repo rate, reverse repo rate) which are subject to change by RBI in credit policy meetings. These ratios are important to understand as this directly impacts other rates, like interest rate on homes and personal loans etc.

CRR (Cash reserve ratio):
This is the percentage of cash deposits that banks have to maintain with RBI. An increase in CRR means that banks have to park more money with the central bank. This sucks out the liquidity in the banking system. As a result, banks have lesser money with them to lend. This could lead to higher interest rate if there isn't enough liquidity in the system.

Repurchase or repo rate:
This is the rate of interest at which the RBI lends money to banks. In other words, it is the apex bank's lending rate to other banks. A cut in repo rate is good news for banks, as they can borrow more at low cost.
Since, RBI raises its lending rate for banks, the cost of funds for banks go up. Consequently, they lend at high rates as well.

Reverse repo rate:
This is the rate at which RBI borrows funds from banks, opposite of repo rate. In other words, this is RBI's borrowing rate. An increase in reverse repo rate is positive for banks because they earn higher returns by lending to RBI.
If RBI slashes its borrowing rate, banks lend at a lower rate. Also, deposit rates go down.

The change in policy rate (repo and reverse repo rates) has an indirect impact on consumers because the lending and borrowing rates of RBI impact the banks. But it is also a signal whether lending and borrowing rates will go up.

Statutory liquidity ratio (SLR):
This rate is another determinant of lending rates. Every bank has to keep an assured amount of funds in some form or the other (cash, gold, government bonds, etc) before lending to customers. This measure controls bank's credit expansion and can lead to higher interest rates.
The overall impact or hike or reduction in the CRR, reverse repo and repo, like this time, lead to a rise or fall in the interest rates, depending on the quantum.
For instance, the impact of a rise in all three this time is being interpreted as a moderate measure.