Question

Explain the components of Legal Reserve Ratio.

Answer 1

Legal Reserve Ratio has two components:

Cash Reserve Ratio (CRR)-It refers to cash reserves of Commercial Banks with the Central Bank as a percentage of their deposits.

Statutory Liquidity Ratio (SLR) refers to reserves in the form of liquid assets (including (i) cash, (ii) gold, and (iii) approved securities) with the Commercial Banks themselves, as a percentage of their total deposits.

Both CRR and SLR are fixed by the Central Bank, and both are a legal binding for the Commercial Banks. In this sense, both CRR and SLR are legal reserve ratios.