Briefly explain the change in cash reserves of commercial banks.
The cash reserve ratio refers to that
proportion of the aggregate deposits which the commercial banks are required to
keep with the Reserve Bank of India in the form of cash. The
Central Bank has the power to vary the CRR. Currently CRR in India
is 4%.
The Central Bank has the power to vary the percentage of
deposits that must statutorily be kept with it by commercial banks, within
certain limits.
When the Central
Bank wants to reduce credit, it will increase the cash ratio to be kept by the
commercial banks. This reduces the capacity of the commercial banks to lend and
thus, the credit creation is controlled.
When the Central Bank considers increasing the credit, it
will lower the cash reserve ratio. Now the commercial banks will have
additional cash which will lead to credit expansion. So, the cash reserves with
commercial banks change according to CRR set by the RBI.
The cash reserve ratio refers to that proportion of the aggregate deposits which the commercial banks are required to keep with the Reserve Bank of India in the form of cash. The Central Bank has the power to vary the CRR. Currently CRR in India is 4%.
The Central Bank has the power to vary the percentage of deposits that must statutorily be kept with it by commercial banks, within certain limits.
When the Central Bank wants to reduce credit, it will increase the cash ratio to be kept by the commercial banks. This reduces the capacity of the commercial banks to lend and thus, the credit creation is controlled.
When the Central Bank considers increasing the credit, it will lower the cash reserve ratio. Now the commercial banks will have additional cash which will lead to credit expansion. So, the cash reserves with commercial banks change according to CRR set by the RBI.
