What am I
I determine the proportion of deposit that banks are expected to hold in liquid form—in cash or in the form of assets specified by the Reserve Bank of India (RBI) such as gold, government bonds and securities. These funds are thus locked and not available to banks to lend to borrowers or to deploy for any other purpose.
I am determined by RBI and am a percentage of net demand and time liabilities (NDTL). Currently, I stand at 24%. While every bank will have its own NDTL, I will remain the same with each of them. This means that today out of every Rs 100 deposited in the bank, the bank has to set aside Rs 24 in liquid assets to maintain the mandated SLR. However, the remaining Rs 76 is not completely at the banks’ disposal. Banks are expected to set aside Rs 6 as the mandated cash reserve ratio, or CRR, (currently 6%) with RBI.
In case banks fail to maintain me, RBI can penalize them.
Why was I brought in the picture?
From consumers’ perspective, I am important as I ensure the solvency of commercial banks. I will also ensure that the bank can make available to the customers’ deposits at any time.
From the macro perspective, however, I help determine liquidity in the system. If I am increased, then a higher proportion of banks’ deposits will be locked up and less funds will be available to loan.
The lesser the amount of funds available, the more they will cost and interest rates will go up. On the other hand, if I am reduced, then the funds available with banks to give out loans will increase, causing a reduction in interest rates.
The central bank also uses me to control inflation.
However, determination of interest rates and controlling of inflation are dependent on a combination of measures. So a change in me alone may not have a significant impact on inflation or interest rates.
How am I different from CRR?
There are two major differences between CRR and me. While CRR can be maintained only in the form of cash, I can be maintained in form of cash or any other approved near-cash asset. Besides, banks have to deposit CRR with RBI, but they can maintain me with themselves and need not deposit me with RBI.