Tuesday, 24 January 2012

Cash Reserve Ratio (CRR) Third Quarter Review of Monetary Policy 2011-12 ( January 24, 2012)

The RBI announces a reduction on the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 6.0 per cent to 5.5 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning January 28, 2012.

Cash Reserve Ratio (CRR):

Banks in India are required to hold a certain proportion of their deposits in the form of cash.  In normal practise banks  don’t hold these as cash with themselves, but deposit it with the Reserve Bank of India (RBI) / currency chests, which is considered as  equivalent 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 Cash Reserve Ratio (CRR). 

Impact of reduction in CRR on the Economy:

-          CRR is an instrument in the hands of the RBI to control liquidity in the banking system.

-          When the CRR is reduced the banks can meet the demand liabilities very easily and the outflow of money increases by way of providing loans to customers and it in turn increases the liquidity in the markets.

-          With regard to the stock markets, with more money available in the market to invest in the securities,  the prices of the securities would increase.

-          The bond markets would improve as the banks would be able to provide the bonds with better interest rates, competing with the other players in the market.

-          The corporates would be able to find more funds from the banks which would  help them in their expansion plans.

In short it increases the liquidity in the market to a large extent.