Hello friends, welcome to all of you, in this article of ours today, through this article, we are going to tell you some important information related to Cash Reserve Ratio CRR like what is going on with Current Repo Rate, or Cash Ratio changed Regularly, What is the difference between Difference CRR and SLR, etc. Cash Reserve Ratio work, how it works, how you sit at home You can understand about the Current Repo Rate, we will tell you important information related to them through this article, so definitely read till the end.
As per Section 42 of the RBI Act, every scheduled bank in India is obligated to maintain a certain average daily balance in the form of Cash Reserves with RBI. This balance is calculated as a percentage of the bank’s Total Net Demand and Time Liabilities in India. The Reserve Bank of India issues notifications in the gazette at regular intervals to specify the percentage of Cash Reserve Ratio (CRR) that banks are required to maintain.
Cash Reserve Ratio (CRR)
The primary objective behind banks maintaining the Cash Reserve Ratio (CRR) is to ensure monetary stability within the country. Adjusting the CRR allows banks to manage their lendable resources by either reducing or increasing them. This, in turn, affects the availability of funds in the economy. If the CRR is increased, it can result in a scarcity of funds, while decreasing the CRR can lead to an increase in fund availability. These adjustments have the potential to create a deflationary or inflationary impact on the economy.
When the RBI Act was initially introduced, it specified a range of 3% to 20% as the minimum and maximum floor rates for the ratio to be maintained by banks. However, this provision was amended in 2006, and the floor rates were eliminated to provide the RBI with the flexibility to determine and announce the percentage of CRR that banks must maintain. This allows the RBI to adapt to the prevailing monetary situation in the country. By adjusting the CRR, the RBI can either expand or contract the credit extended by banks, thereby influencing the amount of credit that a bank can offer.
According to Section 18 of the RBI Act, both scheduled and non-scheduled banks are required to maintain the Cash Reserve Ratio (CRR). Banks calculate their CRR based on their demand and time liabilities as of the Friday of the second preceding fortnight. The Reserve Bank of India has specified the statutory returns for CRR, known as Form A Return, under Section 42(2) of the RBI Act. Additionally, banks are also required to submit Form VIII Return for Statutory Liquidity Ratio (SLR) as per Section 24 of the Banking Regulation Act, 1949
Apart from the requirements mentioned earlier, banks are also required to maintain an incremental Cash Reserve Ratio (CRR) as per Section 42(1A) based on the advice given by the RBI. Currently, there is no incremental CRR that needs to be maintained. Banks must submit a provisional return of Form A within 7 days and the final Form A within 20 days from the end of the relevant fortnight. These submissions ensure compliance with the prescribed guidelines for maintaining CRR.\
RBI provided guidelines following
As per the guidelines provided by the RBI, the following are considered as liabilities for the calculation of Cash Reserve Ratio (CRR):
- a. Liabilities to the banking system computed under Section 42 (1) of the RBI Act.
- b. Credit balances on Asian Currency Union (US Dollar) Account.
- c. Demand and Time liabilities of the respective banks’ offshore units.
Since March 31, 2007, the RBI has discontinued the payment of interest on CRR balances maintained by banks with the RBI.
In the event that a bank fails to maintain the required CRR on a daily basis, the RBI has the authority to impose penal interest. The penal interest rate is set at 3% per annum over the Bank Rate for the amount that falls short of the required balance on that day. If the shortfall continues on subsequent days, the penal rate increases to 5% per annum over the Bank Rate.
Currently, banks are required to maintain a CRR of 4% of their Net Demand and Time Liabilities.
How does Cash Reserve Ratio work
Cash Reserve Ratio (CRR) is a monetary policy tool used by the central bank, such as the Reserve Bank of India (RBI), to regulate and control the money supply in the economy. (Cash Reserve Ratio work) Here’s how the Cash Reserve Ratio works:
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Requirement: Banks in the country are mandated to maintain a certain percentage of their Net Demand and Time Liabilities (NDTL) as reserves with the central bank. (Cash Reserve Ratio work) This percentage is called the Cash Reserve Ratio.(Cash Reserve Ratio work)
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Reserve Maintenance: Banks must hold the specified percentage of their NDTL in the form of cash reserves with the central bank. These reserves cannot be used for lending or any other investment purposes.
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Monetary Control: By varying the Cash Reserve Ratio, the central bank can influence the liquidity in the banking system. When the CRR is increased, banks have to set aside a larger portion of their deposits as reserves, reducing the amount available for lending. Conversely, when the CRR is decreased, banks have more funds at their disposal for lending, stimulating credit expansion (Cash Reserve Ratio work).
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Impact on Money Supply: When banks hold a higher CRR, it reduces the amount of money available for lending, leading to a contraction in the money supply. On the other hand, a lower CRR allows banks to increase lending, leading to an expansion of the money supply.
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Controlling Inflation: The primary objective of using the Cash Reserve Ratio is to control inflationary pressures in the economy. By regulating the amount of money available for lending, the central bank can influence borrowing costs and overall liquidity, thereby managing inflation levels.
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Liquidity Management: CRR also helps the central bank manage liquidity in the banking system. By adjusting the CRR, the central bank can absorb or inject funds into the system, ensuring stability and smooth functioning of the financial markets.
Overall, the Cash Reserve Ratio is an important tool used by the central bank to regulate credit growth, manage inflation, and maintain stability in the financial system.
How Does CRR Affect The Economy
The Cash Reserve Ratio (CRR) has a significant impact on the economy as it directly influences the money supply and liquidity in the banking system. Here’s how the CRR affects the economy:
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Money Supply: CRR affects the amount of money available for lending by banks. When the CRR is increased, banks have to hold a higher proportion of their deposits as reserves with the central bank, reducing the funds available for lending. This contraction in the money supply can help control inflationary pressures in the economy.
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Interest Rates: Changes in the CRR can indirectly affect interest rates. When the CRR is increased, banks have less money to lend, leading to a decrease in the availability of credit. This can result in higher interest rates as the demand for credit outweighs the supply. Conversely, a decrease in the CRR can increase the availability of credit, leading to lower interest rates.
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Credit Expansion: By adjusting the CRR, the central bank can influence credit expansion in the economy. A higher CRR restricts the lending capacity of banks, reducing credit growth. This can be used as a measure to control excessive credit growth and prevent the economy from overheating. Conversely, a lower CRR encourages banks to increase lending, stimulating credit expansion and economic activity.
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Inflation Control: CRR is one of the tools used by the central bank to manage inflation. By regulating the money supply and credit growth, the central bank can control inflationary pressures. Increasing the CRR reduces the amount of money available for lending, which can help curb excessive demand and inflation. Conversely, decreasing the CRR can boost credit growth and stimulate economic activity, potentially leading to inflationary pressures.
Overall, the CRR is an important tool used by the central bank to regulate the money supply, manage inflation, control credit expansion, and maintain stability in the economy. By adjusting the CRR, the central bank can influence interest rates, borrowing costs, and overall liquidity, thereby impacting economic growth and stability.
Difference Between CRR and SLR
CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) are two important monetary policy tools used by the Reserve Bank of India (RBI) to regulate the banking system and manage liquidity in the economy.(Difference CRR and SLR ) Here are the differences between CRR and SLR:
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Definition: Difference CRR and SLR
- CRR: Cash Reserve Ratio refers to the percentage of total deposits that banks are required to keep in the form of cash reserves with the RBI.
- SLR: Statutory Liquidity Ratio refers to the percentage of total deposits that banks are required to maintain in the form of specified liquid assets such as cash, gold, or government-approved securities.
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Purpose: Difference CRR and SLR
- CRR: The primary objective of CRR is to ensure the solvency and stability of banks by restricting the lendable resources and controlling inflation.
- SLR: The main purpose of SLR is to ensure the liquidity and safety of the banking system by compelling banks to maintain a certain proportion of their deposits in liquid assets.
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Regulatory Requirement: Difference CRR and SLR
- CRR: Banks are mandated by the RBI Act to maintain a certain percentage of their Net Demand and Time Liabilities (NDTL) as cash reserves with the RBI.
- SLR: Banks are required to maintain a certain percentage of their NDTL as liquid assets, which can include cash, gold, or approved securities.
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Liquidity Impact: Difference CRR and SLR
- CRR: By increasing or decreasing the CRR, the RBI can regulate the liquidity in the banking system. An increase in CRR reduces the lendable resources of banks, while a decrease in CRR enhances their lendable resources.
- SLR: Changes in SLR also affect the liquidity in the banking system. An increase in SLR restricts the lendable resources of banks, while a decrease in SLR increases their lendable resources.
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Interest Earnings:
- CRR: Banks do not earn any interest on the cash reserves maintained with the RBI.
- SLR: Banks earn interest on the specified liquid assets maintained as SLR.
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Flexibility:
- CRR: The RBI has the flexibility to change the CRR requirements as per the prevailing economic conditions and monetary policy goals.
- SLR: The RBI can also modify the SLR requirements based on the monetary policy objectives and liquidity needs of the economy.
Overall, while both CRR and SLR serve the purpose of regulating the banking system and managing liquidity, they differ in terms of the assets held, their impact on liquidity, and the interest earnings for banks.
Why is the cash reserve ratio changed regularly?
The cash reserve ratio (CRR) is changed regularly by the Reserve Bank of India (RBI) to manage and regulate the liquidity in the banking system. The reasons for changing the CRR are as follows:
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Monetary Policy Tool: Cash Ratio changed Regularly CRR is one of the monetary policy tools used by the RBI to control inflation, stabilize the economy, and ensure financial stability. By adjusting the CRR, the RBI can influence the amount of money available for lending by banks.(cash Ratio changed Regularly)
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Managing Liquidity: The RBI aims to maintain an optimal level of liquidity in the banking system. If there is excessive liquidity, it can lead to inflationary pressures. Conversely, if there is a liquidity crunch, it can hinder economic growth. By changing the CRR, the RBI can absorb or inject liquidity into the system.
Cash Ratio changed Regularly: It’s important to note that the RBI’s decision to change the CRR is based on various factors such as inflation trends, economic indicators, credit demand, liquidity conditions, and overall monetary policy stance. Regular adjustments to the CRR allow the RBI to fine-tune the liquidity levels in the banking system to achieve its monetary policy objectives Cash Ratio changed Regularly.
Current Repo Rate and its Impact
Current Repo Rate: Apart from the Cash Reserve Ratio (CRR), the Reserve Bank of India (RBI) utilizes other measures to regulate the money supply in the economy. The RBI periodically revises the repo rate and reverse repo rate in response to changing macroeconomic conditions. These rate adjustments have varying impacts on different sectors of the economy.
Changes in the repo rate directly affect significant loans such as home loans. An increase or decrease in the repo rate prompts banks and financial institutions to adjust their Marginal Cost of Funds Based Lending Rate (MCLR) accordingly. The MCLR serves as an internal benchmark for banks to determine the interest rates on loans.
A reduction in the repo rate often leads to a decrease in lending rates by banks. This can benefit retail loan borrowers by reducing their Equated Monthly Installments (EMIs). However, for loan EMIs to be lowered, the lender must reduce its base lending rate. According to RBI guidelines, banks and financial institutions are required to promptly pass on the benefits of interest rate cuts to consumers.
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FAQ”S About Cash Reserve Ratio (CRR)
As a result, increasing the CRR reduces the money supply, raises interest rates on home loans, vehicle loans, and other loans, and increases demand for money in the interbank market, lowering inflation.
The Cash Reserve Ratio (CRR) is the percentage of total deposits that a bank must hold in cash in order to operate without risk. The sum is determined by the Reserve Bank of India and is kept with them for financial security.
When the cash reserve ratio increases, the cash to be kept reserved with the central banks also increases. As a result, the finance available for lending and investment purposes reduces. In addition, a higher CRR leads to higher interest rates, which restricts people from borrowing money as the cost of borrowing soars. This, in turn, negatively affects the liquidity of the banking system
The cash reserve ratio is created so the banks have sufficient cash reserves preserved with the central banks. As a result, during the increasing level of inflation or at the time of financial crisis, the central banks have sufficient money to help the nations come out of the crisis.