Understanding Cash Reserve Ratio and its Impact on the Economy
RBI Raises Cash Reserve Ratio to 4.5%: What You Need to Know
In a significant move, the Reserve Bank of India (RBI) has decided to raise the Cash Reserve Ratio (CRR) by 50 basis points to 4.50%, effective May 21, 2022. The current CRR stands at 4% and this increase is aimed at tightening liquidity in the banking system.
CRR is the portion of a bank’s total deposit that is required to be maintained with the RBI in the form of liquid cash. This move by the RBI is expected to have far-reaching implications on the economy and the banking sector.
One of the main objectives of CRR is to ensure that a part of the bank’s deposit is secure with the Central Bank. Additionally, CRR plays a crucial role in controlling inflation. During periods of high inflation, the RBI raises the CRR to reduce the amount of money available for lending, thereby curbing inflation.
When the RBI increases the CRR, the amount of money available with banks decreases, leading to a reduction in lending and investments. This move is part of the RBI’s monetary policy to regulate money supply, inflation, and liquidity in the country.
It is important to note that CRR is different from the Statutory Liquidity Ratio (SLR), another essential component of the monetary policy. While SLR requires banks to maintain reserves of liquid assets like cash, government securities, and gold, CRR mandates banks to maintain only cash reserves with the RBI.
The regular changes in CRR by the RBI have a direct impact on the economy and interest rates. By adjusting the liquidity available in the system through CRR, the RBI can control short-term volatility in interest rates and stimulate growth in the economy.
In addition to CRR, the RBI also revises the repo rate and reverse repo rate to regulate the money supply. Changes in these rates can impact sectors like home loans, with banks adjusting their lending rates accordingly.
Overall, the increase in CRR by the RBI signals a tightening of liquidity in the banking system and underscores the central bank’s efforts to manage inflation and ensure financial stability. As a depositor, it is important to stay informed about these changes and their implications on the economy.
