General Knowledge - Indian Economy - Discussion

Thanks for the explanation @Harsha.

What is Credit Creation?

Thanks for the given information.

Cash Reserve Ratio (CRR) is the amount of money the banks save in RBI. It is a measure through which the RBI controls debt and credit amounts and thus keeps inflation in check. A higher ratio means more money given to RBI, thus reducing the lending power of the banks. Because of this, interest rates shoot up and thus the common man is obliged to spend more money on the interest payments, thus reducing the purchasing power of people and controlling the demand side of inflation. It is usually increased at peak of different economies.

CRR ->4.00% (w.e.f 09/02/2013).

SLR ->22.50%(w.e.f. 14/06/2014).

Cash reserve ratio lower means bank will invest money more in credit purpose.

1. SLR is Statutory Liquidity Ratio. Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and unencumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 25%. RBI is empowered to increase this ratio up to 40%. An increase in SLR also restrict the bank's leverage position to pump more money into the economy.

2. CRR stands for Cash Reserve Ratio. 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 equivalent to holding cash with themselves. 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 Rs.100, and if the cash reserve ratio is 9%, the banks will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 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.

SO is there any relation between CRR AND SLR?

Thanks sneha for the explanation.

Thank you Snigdha for nice explanation.