What is the Cash Reserve Ratio (CRR)?: Cash Reserve Ratio or CRR is determined by the RBI’s monetary policy Committee in the periodic Monetary and Credit policy. At present, every six months, a monetary policy review takes place where The Reserve Bank of India takes stock of the CRR ratio.
What is Cash Reserve Ratio (CRR)? | CRR Importance, Formula, Inflation, SLR
What is the Cash Reserve Ratio (CRR)?
The Reserve Bank Of India has made it mandatory for every bank to store a part of their deposits in the form of cash to provide the customer with the same, in the hour of need. The ratio between the percentage of cash required to be kept as a reserve and the total deposits of the bank is known as the Cash Reserve Ratio. The CRR is either stored in the vault of your bank or is sent directly to RBI. The interest is not provided to the banks on the money that is kept under CRR in RBI.
Importance of the Cash Reserve Ratio(CRR)
CRR can be referred to as one of the major weapons in the arsenal of RBI, using which RBI maintains a desired level of inflation. CRR also helps in controlling the supply of money along with the management of liquidity in the economy.
Liquidity and CRR are inversely proportional to one another. The lower the CRR, the higher is the liquidity with banks, which thus impacts the investment and lending.
A high CRR can also prove to be as negative an impact on the economy as is lesser availability of loanable funds, which consequently slows down the investment. Thereby CRR helps in reducing the supply of money in the economy.
Formula to calculate CRR or how is Cash Reserve Ratio Calculated?
Suppose, the current rate of the CRR is 5%, that means a bank is required to store 5% of the total NDTL or the net demand and Time Liabilities in the form of cash. The bank is not allowed to use this stored money for investment or lending.
Difference between CRR and SLR
You can maintain SLR in the form of both gold or cash, but you are not allowed to do the same with CRR. CRR needs to be maintained only in the form of cash.
The Purpose of CRR
Basically, CRR has two prime objectives:
- CRR is stored in RBI as a part of a bank’s deposit, ensuring the security of the amount. If the customers want their deposits back, CRR makes it readily available.
- It is CRR that inflation keeps under control. When the economy is facing high inflation, RBI increases the CRR, to make sure that banks keep more money as their reserved amount, to lend less money in the future.
CRR and Inflation:
During a time of High Inflation, the government has to make sure that no excess money is available in the economy. According to that, RBI increases the Cash Reserve Ratio, and the amount of money that is available with the bank is decreased. This helps in curbing the excess flow of money in the economy. While when the government needs to provide funds into the system, it lowers the rate of the CRR, which consequently motivates the banks into providing loans to a larger group of people for business or other investment purposes.
The lower the CRR, the greater is the growth rate of the economy.