Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsBANKING AND MONETARY POLICY5 Marks
Question
Explain $\text{CRR}$ and $\text{SLR}$ in detail.
✓
Answer
$1.$ Cash Reserve Ratio $\text{(CRR):}$
Under the $\text{RBI}$ Act, $1934,$ all commercial banks have to keep certain minimum cash reserves with the $\text{RBI}$.
Cash Reserve Ratio is the specified percentage of the total deposits of customers of the commercial bank that the bank has to maintain with the $\text{RBI}$.
Initially $\text{CRR}$ was decided to be $5\%$ of demand deposits and $2\%$ of term deposits.
Since $1962, \text{CRR}$ is variable from $3\%$ to $15\%$ of the total deposits of individual banks.
The main reason behind the cash reserves of commercial banks is to have enough liquidity in the market.
The increase or decrease in the rate of $\text{CRR}$ directly effects controlling inflation and deflation respectively.
Higher $\text{CRR}$ leads to more reserve with $\text{RBI}$. This lessens the total deposits of the commercial banks which forces them to provide less credit/loan to people.
Due to less credit in the economy, people have less supply of money which in turn controls the inflation and increases economic stability.
$2.$ Statutory Liquidity Ratio $\text{(SLR):}$
Statutory Liquidity Ratio is the percentage of total deposits $(25\%$ or more$)$ that the commercial banks have to maintain with $\text{RBI}$ in form of cash, gold and government-approved securities.
If the $\text{SLR}$ is high, instead of banks giving loans and advances to customers, it will buy government securities.
These government securities help $\text{RBI}$ to fulfill the government expenses. A high $\text{SLR}$ reduces the capacity of banks to give loans to customers thereby, reducing the supply of credit/money in the economy,
A low $\text{SLR}$ increases the capacity of banks to give loans thus increasing credit creation in the economy.
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