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Thursday, October 9, 2008

Cash Reserve Ratio


Cash Reserve Ratio or CRR in India is the amount of money that every bank has to deposit with the RBI per customer. Every time a customer deposits cash to the bank, the bank has to correspondingly deposit a portion of that cash to the RBI. RBI decides this percentage of money that each bank has to deposit with it. The RBI holds the control on the CRR because, the CRR can influence the credit conditions in our country. If the CRR is increased, the amount of liquid cash in circulation in the country would come down and similarly if the CRR is decreased, the cash circulation in the country would increase.

Say if the CRR of the country is 10%, and you go to a bank to deposit Rs. 1000/- the bank will have to deposit at least Rs. 100/- with RBI. The remaining funds can be used by the bank to grant loans to other customers and earn an income for itself.

The purpose of having a CRR is to satisfy withdrawal demands and also as a shield to protect the depositors money atleast to a certain extent.

The CRR % would determine the amount of cash in circulation in the country. If the RBI reduces the CRR then the banks would have extra surplus cash which they would lend out and create a positive influence in the economy...

Recently on Oct 6th 2008, the RBI reduced the CRR by 50 basis points. The current CRR in India is 8.5%. This reduction of 50 basis points has infused nearly Rs. 20,000/- crores into the Indian market. This would help ease the extreme credit crunch the country is facing as a result of the US and global economic slow down.

2 comments:

  1. Nice explanation Anand. Also have some posts on derivatives trading.

    ReplyDelete
  2. thanks for explanation in simple way. please tell me meaning of reducing CRR by 50 basis points?

    ReplyDelete

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