• Monetary Policy Tools – 2

    Cash Reserve Requirement (CRR)

    Cash Reserve Requirement or Cash Reserve Ration (CRR) mandates the banks to hold a certain percentage of the deposit in the form of cash or cash equivalents. Banks can lend the rest of the money to the lenders after maintaining the reserve ratio or requirement. Banks do not normally keep the reserved cash with them; instead they deposit it with the RBI or invest in Government bonds or treasury bills which are considered to be cash equivalents. Cash Reserve Requirement is a very strong monetary tool with some important benefits. They are:

    • It helps to reduce the liquidity in the financial system. It is a very strong monetary policy tool to check the liquidity in the financial system.
    • It encourages the banks to invest in the government bonds and treasury bills, which the government sells to borrow money from the market.
    • It also reduces the risk of banking operation by restricting the lending percentage. Reserved money also helps the banks to cater any sudden liquidity crisis.

    Statutory Liquidity Ratio (SLR)

    Statutory Liquidity Ratio indicates the minimum percentage of total demand and liabilities the banks has to maintain as liquid assets at the close of every business day to support any sudden increase in withdrawal and cash demand. The liquid assets can be in the form of cash, gold and government approved securities. It is an efficient monetary policy tool and the benefits it provides are

    • It helps to reduce the liquidity in the financial system by restricting banks to hold some liquidity with them.
    • It encourages the banks to invest in the government bonds and treasury bills, which the government sells to borrow money from the market.
    • It also reduces the risk of bank being default on sudden increase in demand and liabilities.

    CRR uses total deposit as the reference while SLR uses the total demand or liabilities as the reference while calculating the money to be held. This is the main difference between SLR and CRR.

    On July 2011, the current policy rates inIndia(as per the Reserve Bank ofIndiasite) are given below:

    Bank Rate 6.0%
    Repo Rate 8.50%
    Reverse Repo Rate 7.50%
    CRR 6.0%
    SLR 24.0%
    As of 26th October, 2011

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