Cash Reserve Ratio (CRR)

 What is Cash Reserve Ratio (CRR) & How Does it Impacts on Economy ?

The cash reserve ratio (CRR) , is a component of the Reserve Bank of India's monetary policy that helps to reduce liquidity risk, inflation control and manage money supply in the economy. When the CRR rate is raised, the capacity with which banks can issue loans reduces, and interest rates rise as a result.

Scheduled Commercial Banks (SCB) are subject to CRR, while Regional Rural Banks (RRB) and Non Banking Financial Companies (NBFC) are not.

What is the Cash Reserve Ratio (CRR)?

The Cash Reserve Ratio (CRR) is the percentage of cash that must be retained in reserves in relation to a bank's total deposits.

The Monetary Policy Committee(MPC) of the Reserve Bank of India decides on the Cash Reserve Ratio in its monthly Monetary and Credit Policy. In the interval of six weeks, the Reserve Bank of India(RBI) conducts a monetary policy review, which includes a review of the CRR. The CRR is one of the RBI's main weapons for preserving a desirable level of inflation, monitoring the money supply, and ensuring liquidity in the economy. The lower the CRR, the more liquidity the banks have, which sustains into the economy and investment activity.

What is the current Cash Reserve Ratio (CRR) rate?

The CRR is one of the most essential components of the RBI's monetary policy, with a current rate of 4.5%. When you consider that the previous lower limit for the CRR rate was 4.5%, you can consider the present rate to be low compared to current inflation level.

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What is the goal for the reserve requirement ratio?

There are several important reasons why the Cash Reserve Ratio (CRR) exists.

• CRR ensures that banks always maintain the lowest levels of liquidity. Thus, customers have immediate access to funds even when demand is high.

• RBI holds a portion of the bank deposit, which is safe as defined in CRR.

• Cash Reserve Ratio (CRR) helps to control inflation. If inflation is high,  CRR can be increased to dissuade banks from lending more.

• CRR is also associated with the lowest lending price that banks cannot lend. The base price guarantees the transparency of the loan and the CRR serves as the base price for this.

• Cash Reserve Ratio (CRR) allows you to manage cash deliveries within the economy. Lowering the CRR will give you a high quality effect.

Cash Reserve Ratio (CRR) to control inflation. 

The Cash Reserve Ratio (CRR) has a direct impact on inflation as it affects the liquidity level of the country's economy. CRR can be thought of  as one of the taps that RBI has to control the flow of funds into the economy.

If inflation is high and the money supply  is pushing it up, the RBI decides to raise CRR requirements,which could reduce a bank's lending capacity. Less credit means less money flowing through the economy and less pressure on inflation.

How is the Cash Reserve Ratio (CRR) calculated?

CRR is calculated as a percentage of the bank's NDTL.NDTL can be described as the sum of a bank's accounts receivable and accounts payable (deposits) with a public bank or another bank minus  deposits with other banks.

Bank liabilities can take the form of Current Deposits, DDs, Sight Debts such as Cash Certificates, FDs, Gold Deposits, Long Term Debts such as Cash Certificates, Other Visual and Long Term Debts Interests such as Deposits and Dividends. 

The simple formula for CRR is as follows: It looks like.

(CRR) = (Liquid Cash / NDTL) * 100

Why does the reserve requirement ratio keep changing ?

The Cash Reserve Ratio (CRR) acts as a customer safety net, ensuring sufficient liquidity for banks to meet the growing demand for funds from withdrawals. In addition, RBI is free to achieve other objectives and increase or decrease CRR. This means that you can regulate the CRR that banks need at any time to better control the flow of funds in the economy and investment. This target is affected by economic dynamics, so the reserve requirement ratio should increase and decrease regularly as it changes.

Differences between CRR and SLR

CRR and SLR are both components of RBI's monetary policy, the full form of CRR is the reserve requirement ratio, but full form of SLR is the Statutory Liquidity Ratio. Statutory Liquidity Ratio (SLR) is a government word in India for the reserve requirement that commercial banks are allowed to retain authorized security in the form of cash, gold reserves, or RBI (Reserve Bank of India) before offering credit to users.. However, here these funds are  not only in the form of cash, but also in the form of gold, PSU bonds, government bonds, and all assets designated by the RBI. 

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The main differences between CRR and SLR can be summarized as follows:

•Cash Reserve Ratio (CRR) includes only cash reserves, but Statutory Liquidity Ratio (SLR) include liquid assets such as gold, bonds and securities. 

•Money booked as CRR does not earn interest, but banks earn interest on Statutory Liquidity Ratio (SLR)

• CRR money is held at RBI, but SLR money is held at the bank itself. 

  Cash Reserve Ratio (CRR) has insights on how it affects lending, investment, and the broader economy. You can make informed financial decisions.

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