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What is CRR?

The Reserve Bank of India (Amendment) Bill, 2006 has been enacted
and has come into force with its gazette notification. Consequent upon amendment to
sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the
monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for
scheduled banks without any floor rate or ceiling rate. [Before the enactment of this
amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe
CRR for scheduled banks between 3 per cent and 20 per cent of total of their demand
and time liabilities].


RBI uses CRR either to drain excess liquidity or to release funds needed for the growth
of the economy from time to time. Increase in CRR means that banks have less funds
available and money is sucked out of circulation. Thus we can say that this serves duel
purposes i.e.(a) ensures that a portion of bank deposits is kept with RBI and is totally risk-
free, (b) enables RBI to control liquidity in the system, and thereby, inflation by tying the
hands of the banks in lending money.



What is CRR (For Non Bankers): CRR
means Cash Reserve Ratio. Banks in India are
required to hold a certain proportion of their
deposits in the form of cash. However, actually
Banks dont hold these as cash with themselves,
but deposit such case with Reserve Bank of
India (RBI) / currency chests, which is
considered as equivlanet to holding cash with
RBI. This minimum ratio (that is the part of the
total deposits to be held as cash) is stipulated by
the RBI and is known as the CRR or Cash
Reserve Ratio. Thus, When a banks deposits
increase by Rs100, and if the cash reserve ratio
is 6%, the banks will have to hold additional Rs
6 with RBI and Bank will be able to use only Rs
94 for investments and lending / credit purpose.
Therefore, higher the ratio (i.e. CRR), the
lower is the amount that banks will be able to
use for lending and investment. This power of
RBI to reduce the lendable amount by
increasing the CRR, makes it an instrument in
the hands of a central bank through which it
can control the amount that banks lend. Thus,
it is a tool used by RBI to control liquidity in the
banking system.

Statutory liquidity ratio refers amount that the commercial banks require to maintain in the form of
gold or govt. approved securities before providing credit to the customers. Here by approved
securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is
determined and maintained by the Reserve Bank of India in order to control the expansion of bank
credit. It is determined as percentage of total demand and time liabilities. Time Liabilities refer to the
liabilities, which the commercial banks are liable to pay to the customers after a certain period
mutually agreed upon and demand liabilities are such deposits of the customers which are payable on
demand. example of time liability is a fixed deposits for 6 months, which is not payable on demand but
after six months. example of demand liability is deposit maintained in saving account or current
account, which are payable on demand through a withdrawal form of a cheque. SLR is used by
bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of
gold,cash or other approved securities.Thus, we can say that it is ratio of cash and some other
approved liabilities(deposits). It regulates the credit growth in India
The liabilities that the banks are liable to pay within one month's time, due to completion of maturity
period, are also considered as time liabilities. The maximum limit of SLR is 40% and minimum limit of
SLR is 23% In India, Reserve Bank of India always determines the percentage of SLR. There are
some statutory requirements for temporarily placing the money in government bonds. Following this
requirement, Reserve Bank of India fixes the level of SLR. At present, the minimum limit of SLO that
can be set by the Reserve Bank is 23% AS ON January 2014. A reduction of SLR rate looks eminent
to support the credit growth in India.
The main objectives for maintaining the SLR ratio are the following: to control the expansion of bank
credit. By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit
expansion. to ensure the solvency of commercial banks. to compel the commercial banks to invest
in government securities like government bonds.
If any Indian bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes
liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal interest at the rate of
3% per annum above the Bank Rate, on the shortfall amount for that particular day. But, according to
the Circular, released by the Department of Banking Operations and Development, Reserve Bank of
India; if the defaulter bank continues to default on the next working day, then the rate of penal interest
can be increased to 5% per annum above the Bank Rate. This restriction is imposed by RBI on banks
to make funds available to customers on demand as soon as possible. Gold and government
securities (or gilts) are included along with cash because they are highly liquid and safe assets.
The RBI can increase the SLR to contain inflation, suck liquidity in the market, to tighten the measure
to safeguard the customers money. In a growing economy banks would like to invest in stock market,
not in government securities or gold as the latter would yield less returns. One more reason is long
term government securities (or any bond) are sensitive to interest rate changes. But in an emerging
economy interest rate change is a common activity.
Statutory liquidity ratio is the amount of liquid assets such as precious metals (gold) or other
approved securities, that a financial institution must maintain as reserves other than the cash . The
statutory liquidity ratio is a term most commonly used in India.
The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it
respectively. This counter acts by decreasing or increasing the money supply in the system
respectively. Indian banks holdings of government securities (Government securities) are now close
to the statutory minimum that banks are required to hold to comply with existing regulation. When
measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the
nationalisation of banks in 1969) in 200506.
While the recent credit boom is a key driver of the decline in banks portfolios of G-Sec, other factors
have played an important role recently.
These include:
1. Interest rate increases.
2. Changes in the prudential regulation of banks investments in G-Sec.
Most G-Sec held by banks are long-term fixed-rate bonds, which are sensitive to changes in interest
rates. Increasing interest rates have eroded banks income from trading in G-Sec.
Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around
108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This was
to increase lending by the banks to the corporates and resolve liquidity crisis. Providing economy with
the much needed fuel of liquidity to maintain the pace of growth rate. However the exercise became
futile with banks being over cautious of lending in highly shaky market conditions. Banks invested
almost 70% of this money to rather safe Govt securities than lending it to corporates.
Value and formula[edit]
The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the
liabilities of the bank which are payable on demand anytime, and those liabilities which are accruing in
one months time due to maturity) of a bank.
SLR rate = (liquid assets / (demand + time liabilities)) 100%
This percentage is fixed by the central bank. The maximum and minimum limits for the SLR are 40%
and 25% respectively in India.
[1]
Following the amendment of the Banking regulation Act(1949) in
January 2007, the floor rate of 25% for SLR was removed. Presently, the SLR is 23%.
Difference between SLR and CRR[edit]
Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of
banks that they can pump in economy
SLR restricts the banks leverage in pumping more money into the economy. On the other hand,
CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the Central
Bank to reduce liquidity in banking system. Thus CRR controls liquidity in banking system while SLR
regulates credit growth in the country.
The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas
with CRR it has to be only cash. CRR is maintained in cash form with central bank, whereas SLR is
money deposited in govt. securities. CRR is used to control inflation.



















Cash Reserve Ratio and Interest Rates
(Per cent)
Item/Week Ended
2013 2014
Mar. 22 Feb. 21 Feb. 28 Mar. 7 Mar. 14 Mar. 21
1 2 3 4 5 6
Ratios

Cash Reserve Ratio 4.00 4.00 4.00 4.00 4.00 4.00
Statutory Liquidity Ratio 23.00 23.00 23.00 23.00 23.00 23.00
Cash-Deposit Ratio 4.78 4.70
..
4.76
.. ..
Credit-Deposit Ratio 77.95 77.08
..
77.18
.. ..
Incremental Credit-Deposit Ratio 77.28 70.35
..
71.86
.. ..
Investment-Deposit Ratio 29.71 29.51
..
29.09
.. ..
Incremental Investment-Deposit Ratio 31.85 27.85
..
24.57
.. ..
Rates

Policy Repo Rate 7.50 8.00 8.00 8.00 8.00 8.00
Reverse Repo Rate 6.50 7.00 7.00 7.00 7.00 7.00
Marginal Standing Facility (MSF) Rate 8.50 9.00 9.00 9.00 9.00 9.00
Bank Rate 8.50 9.00 9.00 9.00 9.00 9.00
Base Rate 9.70/10.25 10.00/10.25 10.00/10.25 10.00/10.25 10.00/10.25 10.00/10.25
Term Deposit Rate >1 Year 7.50/9.00 8.00/9.10 8.00/9.10 8.00/9.25 8.00/9.25 8.00/9.25
Savings Deposit Rate 4.00 4.00 4.00 4.00 4.00 4.00
Call Money Rate (Weighted Average) 7.65 8.09 7.93 7.88 8.18 8.88
91-Day Treasury Bill (Primary) Yield 8.02 9.11 9.15 9.19 9.27 9.19
182-Day Treasury Bill (Primary) Yield
.. ..
9.10
..
9.12
..
364-Day Treasury Bill (Primary) Yield 7.79 9.00
..
9.03
..
8.89
10-Year Government Securities Yield 7.96 8.81 8.86 8.87 8.82 8.82
RBI Reference Rate and Forward Premia

INR-US$ Spot Rate (` Per Foreign Currency) 54.34 62.16 62.07 60.99 61.52 61.05
INR-Euro Spot Rate (` Per Foreign Currency) 70.10 85.27 85.03 84.53 85.23 84.18
Forward Premia of US$ 1-month 9.05 8.30 9.47 10.63 11.12 10.03
3-month 7.95 8.94 9.09 9.71 9.23 8.85
6-month 7.40 8.40 8.64 8.85 8.65 8.49