Question

Explain the meaning of cash reserve ratio and statutory liquidity ratio.

Answer 1

Cash Reserve Ratio is the fraction of the deposits that commercial banks are required to keep as cash reserves with the central bank by mandate. CRR is a powerful instrument to control credit and lending capacity of the banks.

Statutory Liquidity Ratio is a part of the deposits which commercial banks have to keep with themselves. Banks are required to keep a fixed percentage of its assets in cash, gold or other liquid securities. SLR is raised to reduce the ability of the banks to give credit.