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Home / Opinion / Online-views /  One-Minute Guide | Cash reserve ratio

Who am I?

I am part of every scheduled commercial bank’s overall cash balance. I am that portion of the banks’ net demand and time liabilities or deposits which needs to be kept in a current account maintained with the Reserve Bank of India (RBI). I am expressed as a percentage of overall deposits. On 17 September, RBI cut 25 basis points and reduced me from 4.75% to 4.50%. So now for every 100 of deposits that a bank holds, it will have to keep aside 4.50 with RBI. I am required to be calculated and maintained on a fortnightly basis. I am one of the tools that the central bank uses to manage money supply and liquidity in the market. I can be reduced or increased at the discretion of RBI.

Why am I reduced?

RBI will reduce me if it needs to increase the money supply in the economy. If there is less liquidity in the system, then to ease upward pressure on market interest rates or improve credit growth, RBI may choose to reduce me. Typically, this will go towards the bank increasing its lending and, hence, the amount will go into the overall money supply in the economy. Moreover for banks, this additional amount earns an interest as opposed to being part of CRR where the bank gets no earning. However, there are other requirements, such as statutory liquidity ratio, banks need to take care of.

Once the money is lent by the bank to a customer, it can be used for business or personal use adding to either overall industrial growth or consumption in the economy.

Why am I increased?

RBI will increase me to reduce the outstanding liquidity in the system. Too much liquidity in an economy fuels inflation and when that happens, RBI can increase the CRR so that banks have lesser amount to lend. Higher CRR, therefore, leaves the banks with a lower total pot to lend from and helps curb high credit growth which may be fuelling inflation.

What I mean for you

In theory, a cut in CRR also signals the easing in monetary policy. Currently liquidity is at comfortable levels and with the cut in CRR, the central bank has given some extra money to the banks that it can lend to borrowers. Generally, CRR cut has a big impact on the banks, but, the effect on consumers doesn’t completely depend only on CRR. Other factors, such as change in repo rate, economic growth and credit growth play a key role when it comes to passing the benefit to the customers. Also, it is up to each individual bank how it uses excess funds freed up by a reduction in CRR.

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