One of the pecuniary policies used by the Reserve Bank of India (RBI) to control the money supply in the economy is the Cash Reserve Ratio. Another monetary policy tool used similar to CRR is the SLR – Statutory Liquidity Ratio which is a reserve requirement banks have to keep before giving credit to customers.
Likewise, policy tools like repo rate, reverse repo rate, open market operations, etc are also used. Reading this guide could be very useful to understand the difference between CRR and SLR, the current cash reserve ratio that has been fixed by RBI, the significance of CRR, and more.
What is CRR – Cash Reserve Ratio?
A proportion of cash that is essential to be kept as reserves in every bank against the total deposit in the bank is called CRR or the Cash Reserve Ratio. This amount of liquid cash should be kept in the bank’s vault of it should be sent to the Reserve Bank of India. The bank cannot use this reserve money for any kind of economic and commercial use. By keeping this huge amount reserve, the bank will not earn any interest on this particular amount.
Importance of CRR
It is the Cash Reserve Ratio that helps in circulating cash in the economy to manage the overall liquidity. The rate of CRR is fixed by the RBI according to the money supply in the financial market. The rate of the cash reserve ratio will be increased by the RBI when there is an increase in the money supply and vice versa. This is done to remove any excess funds and to let out cash in the market. Some of the advantages of holding the cash reserve ratio are as follows:
- CRR ensures that the liquidity system is stable and maintained well in all the commercial banks
- This can help in improving the deteriorating rate by absorbing the liquidity when market interest rates go down penetratingly.
- When the CRR is maintained in a bank, it can build and tolerate the solvency position
- In case if the CRR rates reduced by the RBI, it can benefit the borrowers as the bank can provide more advances
- For the smooth supply of cash and credit in the economy, the RBI controls and coordinates the credit maintained by the bank through this CRR rate
For both the banks and depositors, the cash reserve ratio is a very important factor. When a bank maintains the required CRR rate, the depositors will not have to bother about the deposit amount they have made to that bank, because a certain portion of the deposits is safe as reserve maintained by the Reserve Bank of India.
When the CRR rate is low, the bank can benefit a lot through it. The bank looks forward to lending money to the borrowers and they always retain a small amount of money with them for other uses. When the CRR rate is low, banks can easily attain a good percentage of profit. Whenever a bank requires a huge fund to meet any unexpected demand to withdraw money, they will always have it since they maintain the CRR ratio fixed by the RBI.
What is the current CRR rate?
The Monetary Policy Committee of RBI decides the CRR rate in India. The RBI takes the stock of the cash reserve ratio in the monetary policy review conducted every six weeks. The current rate of CRR is fixed at 3.50% by the Reserve Bank of India.
CRR and its impact on the market
The main objective of the Cash Reserve Ratio is to make sure that a small percentage of funds is always available with the bank against the deposits made in the bank. Likewise, the CRR enables the RBI to control the rates and overall liquidity in the country.
All the banks like to have a low CRR because, with the low CRR rate, they can easily maintain the specific ratio of funds with the RBI. This reserve money is kept for free in the Reserve Bank of India and it does not earn any interest on this amount. But when the CRR rate is low, then the bank will not be able to lend a huge amount to the borrowers.
Moreover, the banks will increase the interest rate that will hold back the borrowers from applying for loans due to the high – interest rate. When it comes to investing money in other businesses, the bank will be able to pool in a huge amount when the CRR rate is low.
However, when the CRR rate is high, banks will not be in a position to invest money for any other businesses, thereby reduces the interest rates of the loan amounts. Also, the money supply of the banking systems will enhance when the cash ratio rate is low.
How to calculate the CRR rate?
To calculate the CRR rate you do not have to search for any formula since there are no specific formulas for this. In simple words, the cash reserve ratio can be calculated as the percentage of net demand and the time liabilities. In short, it is stated as NDTL and this is the aggregate savings account, current account, and also the fixed deposit balances that the bank holds. When you get the aggregate amount, 3.50% of the aggregate balance of the three accounts mentioned here should be kept with the RBI.
Difference between CRR and SLR
Now, what is SLR? What exactly are the difference between SLR and CRR and how they are related? See the briefings related to the same for your reference. SLR is the Statutory Liquidity Ratio, a reserve that is compulsory to keep in the banks. This ratio is based on a particular percentage of time liabilities and the net demand. This reserve is also stored as liquid assets. The objective behind this is to maintain the stability of banks by limiting the credit capacity offered to its customers. I hope you know what CRR and SLR are now. Below you can see a table to give you a clear understanding of the difference between CRR and SLR.
|CRR full form – Cash Reserve Ratio||SLR full form – Statutory Liquidity Ratio|
|It is the percentage of money a bank has to keep with the RBI as liquid money||SLR is only a proportion of liquid assets to demand and time liabilities.|
|CRR can only be maintained in the form of cash||SLR can be maintained in the form of cash, gold, and also in the form of government-approved securities.|
|This amount regulates the flow of money in the economy||SLR safeguards the solvency of the banks.|
|Maintained by RBI||Not Maintained by RBI|
|CRR regulates the liquidity of the county||SLR manages the credit growth of the country.|
|RBI controls the excess money flow in the economy through CRR||SLR condition ensures meeting out the unexpected demand of depositors( by selling bonds)|
|Helps in regulating the liquidity||Regulates Credit Growth in the Economy|
Both CRR and SLR are required to be used to control the excess money flow and to meet unexpected demand for deposits. It also benefits the depositors as the ratio of their deposits is safe with RBI. For the betterment of the economy, these are required for the government to protect and make development in our nation.