Cash Reserve Ratio (CRR) is a tool used by the central bank of a country to regulate the amount of funds that banks can keep with them. It has a significant impact on the economy as it affects the liquidity in the market.
The CRR rate is the percentage of total deposits that banks are required to keep with the central bank. It is a key tool used by the central bank to regulate the money supply in the economy. When the CRR rate is increased, banks have to keep more funds with the central bank, which reduces the amount of money they have to lend to customers. Similarly, when the CRR rate is reduced, banks have more funds available for lending, which can increase the amount of money in circulation in the economy.
Impact of CRR Over Repo Rate
The CRR rate is determined by the central bank based on various factors such as inflation, economic growth, and liquidity in the market. The rate is reviewed periodically and can be changed to meet the changing needs of the economy. The current CRR rate in India is 4%.
The CRR rate has a direct impact on the repo rate and SLR rate. Repo rate is the rate at which banks borrow funds from the central bank, while SLR rate is the percentage of total deposits that banks have to keep in the form of government-approved securities. When the CRR rate is increased, banks have less money to lend, which can lead to an increase in the repo rate as banks try to borrow more funds from the central bank. Similarly, an increase in the CRR rate can also lead to an increase in the SLR rate as banks look for alternative ways to maintain the required percentage of total deposits in the form of government-approved securities.
Benefits of the CRR Rate
The CRR rate is an important tool for the central bank to regulate the money supply in the economy. It can be used to control inflation by reducing the amount of money in circulation, which can reduce demand and bring prices down. Similarly, it can also be used to boost economic growth by increasing the amount of money in circulation, which can lead to increased demand and higher economic activity.
One of the major benefits of the CRR rate is that it ensures that banks maintain a minimum level of reserves with the central bank. This reduces the risk of bank failures and ensures the stability of the financial system. In addition, the CRR rate can also be used to control liquidity in the market, which can prevent excessive lending and borrowing.
The CRR rate can also affect the profitability of banks. When the CRR rate is increased, banks have less money available for lending, which can reduce their profitability. Similarly, a decrease in the CRR rate can increase the profitability of banks by providing them with more funds for lending.
Conclusion
The CRR rate is an important tool for the central bank to regulate the money supply in the economy. It has a significant impact on the liquidity in the market and can be used to control inflation and boost economic growth. The CRR rate also ensures the stability of the financial system by reducing the risk of bank failures. While it can affect the profitability of banks, it is a necessary tool to maintain the health of the economy.
