What is meant by CRR? Briefly examine its role in credit control.
Cash Reserve
Ratio (CRR) is the amount of funds that all Scheduled
Commercial Banks (SCB) excluding Regional Rural Banks (RRB) are required
to maintain without any floor or ceiling rate with RBI with reference to their
total net Demand and Time Liabilities (DTL) to ensure the liquidity and
solvency of Banks.
How does CRR affect the economy?
Increase in CRR (to control inflation):- An increase in the CRR leads to banks being forced to keep more
money with RBI reducing the funds available for lending. Increase in CRR means lesser liquidity, which
in turn leads, to higher interest rates, implying fewer new projects, more
interest costs for companies and individuals less spending on luxuries, lesser
investments opportunities, etc. this will cause lesser demand and hence prices
will come down (i.e. inflation rate will come down).
Decrease in CRR ( to control deflation):- A decrease in the CRR leads to banks being forced to keep less
money with RBI increasing the funds
available for lending. Decrease in CRR means more liquidity, which in turn leads, to lower
interest rates, implying more investment in new projects, less interest costs for companies and individuals more
spending on luxuries, more investment opportunities, etc. this will cause more
demand and hence market & prices will go up (i.e. deflation in the market
is controlled).
Cash Reserve Ratio (CRR) is the amount of funds that all Scheduled Commercial Banks (SCB) excluding Regional Rural Banks (RRB) are required to maintain without any floor or ceiling rate with RBI with reference to their total net Demand and Time Liabilities (DTL) to ensure the liquidity and solvency of Banks.
How does CRR affect the economy?
Increase in CRR (to control inflation):- An increase in the CRR leads to banks being forced to keep more money with RBI reducing the funds available for lending. Increase in CRR means lesser liquidity, which in turn leads, to higher interest rates, implying fewer new projects, more interest costs for companies and individuals less spending on luxuries, lesser investments opportunities, etc. this will cause lesser demand and hence prices will come down (i.e. inflation rate will come down).
Decrease in CRR ( to control deflation):- A decrease in the CRR leads to banks being forced to keep less money with RBI increasing the funds available for lending. Decrease in CRR means more liquidity, which in turn leads, to lower interest rates, implying more investment in new projects, less interest costs for companies and individuals more spending on luxuries, more investment opportunities, etc. this will cause more demand and hence market & prices will go up (i.e. deflation in the market is controlled).
