CRR – Cash Reserve Ratio
Recently we had a question thorough email as what does CRR mean that Reserve bank of India RBI used to declare in there quarterly policy. As full form of CRR is cash reserve ratio and the definition of reserve ratio is the amount of money that the bank should have in cash. Currently the Cash Reserve Ratio (CRR) in India is 4 percent which means that the 4 percent of amount need to be reserved by the bank.
Let us take an example to understand this better. Suppose a bank A has total deposits of one crore rupee and the CRR rate declared by the RBI is 4 percent then the bank has to reserve 4 Lakh Rupee. When we found the definition we thought that how does it matter for a bank to keep 4 percent of the total amount and why RBI changes this rate frequently. What is the importance of CRR as per banking? Let take each question one by one and we will try to explain this
Before entering to the main question you should understand the term called liquidity. Basically liquidity is the defined as the ability to convert asset to cash quickly. This means basically cash that gives the ability to buy asset, do marketability or help the bank in case of crisis.
Why RBI Changes CRR?
RBI has to maintain the CRR to allow flow of money and to control inflation. If the CRR rate is increased then bank will have less amount to loan and to earn money. As we all know bank do not work for losses therefore if CRR will be increased then bank will increase the loan rate. This will increase the EMI etc for the end user but this will increase the liquidity and control the inflation.Let us take an example, if the CRR rate was 5 % and the bank has 1 crore rupee then they need to keep 5 Lakh rupee to RBI but if the CRR rate is changed to 4% then the bank will have 1 lakh rupee to lend. Think when banks have 100’s of crore and a .25% is changed. I assume you can imagine the amount.
Importance of CRR ?
CRR plays important role in maintaining the growth and inflation and is used to boost economy or control the flow of money. CRR directly impacts the inflation and growth rate of the economy is termed as one of the important factor apart from Repo Rate and reverse Rate. As such SLR also plays an important role. RBI had to provide the rate in there quarterly and mid quarterly review.
As of today 13th March below are rates
- CRR – 4 Percent
- SLR – 23 Percent
- Repo Rate – 8 Percent
- Reverse Repo Rate – 7 Percent
- Bank Rate – 9 Percent