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  don’t 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 bank’s 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 2005–06.

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 bank’s 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

Item/Week Ended 2013 2014

Mar. 22 Feb. 21 Feb. 28 Mar. 7 Mar. 14

1 2 3 4 5

       

Cash Reserve Ratio 4.00 4.00 4.00 4.00 4.00

Statutory Liquidity Ratio 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

       

Policy Repo Rate 7.50 8.00 8.00 8.00 8.00

Reverse Repo Rate 6.50 7.00 7.00 7.00 7.00

Marginal Standing Facility (MSF) Rate 8.50 9.00 9.00 9.00 9.00

8.50 9.00 9.00 9.00 9.00

9.70/10.25 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

Savings Deposit Rate 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

91-Day Treasury Bill (Primary) Yield 8.02 9.11 9.15 9.19 9.27

182-Day Treasury Bill (Primary) Yield .. .. 9.10 .. 9.12

364-Day Treasury Bill (Primary) Yield 7.79 9.00 .. 9.03

10-Year Government Securities Yield 7.96 8.81 8.86 8.87 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

INR-Euro Spot Rate (` Per Foreign Currency) 70.10 85.27 85.03 84.53 85.23

Forward Premia of US$ 1-month 9.05 8.30 9.47 10.63 11.12

3-month 7.95 8.94 9.09 9.71 9.23

6-month 7.40 8.40 8.64 8.85 8.65