The CRR or Cash Reserve Ratio, is one of the many policies employed by the Reserve Bank of India (RBI) to bring balance to the economy. However, CRR not only affects the economy but also your personal finances.
Read on to learn the meaning of cash reserve ratio, its objective, how it works and more.
Cash Reserve Ratio refers to the percentage of the deposits that banks must keep in cash or a cash equivalent. The RBI decides this percentage. Banks must keep this amount available in their vault or with RBI to maintain liquidity for the consumer’s financial security.
Banks cannot use this amount to extend a loan or pay off their debts. Since the Cash Reserve Ratio affects the bank’s liquidity, it also has an impact on the interest rates offered by them. Depending on the market conditions, the RBI regularly updates the rate at which it calculates CRR.
Here are some objectives of implementing CRR:
Since the economy is volatile, the RBI monitors and updates its monetary policies regularly. Doing so helps control inflation and manage liquidity risks.
The RBI changes the Cash Reserve Ratio periodically to ensure that it aligns with the nation’s fiscal goals. CRR also impacts a bank’s reserves and helps create a safety net for the bank to fall back on in case of a sudden rise in the demand for funds.
Since this demand can also fluctuate based on economic factors, changing the CRR helps banks be better prepared.
Whatever the RBI’s CRR rate is, banks must keep that percentage of their Net Demand and Time Liabilities (NDTL) in their reserve. NDTL is the sum of bank deposits made by the customers in the bank subtracted from the deposits made by the bank with the public or other banks.
Consider this example to understand how it affects the bank’s liquidity. Say the current CRR rate is 4.50%. Thus, banks will have to put ₹4.5 for every ₹100 of their NDTL.
If the RBI increases this Cash Reserve Ratio, banks have to increase the funds in their cash reserves. This can lower the funds they can lend, which can result in higher interest rates. On the other hand, if the Cash Reserve Ratio is lower, banks will have more funds to lend and can offer lower interest rates.
In terms of its impact on the economy, a high CRR would mean less circulation of cash, which can help curb inflation. Once the inflation is under control, the RBI will lower the CRR rate to push money back into the market.
With this understanding of what is Cash Reserve Ratio, you can better evaluate the market to make borrowing decisions and ensure your costs are low. However, with the Online Personal Loan, you don’t have to worry about when to borrow affordably.
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The Cash Reserve Ratio is the percentage of a bank’s NTDL that it needs to keep as a reserve with the RBI. As of December 2023, RBI has kept the CRR at 4.50%.
To calculate the Cash Reserve Ratio, banks must know their Net Demand and Time Liabilities (NDTL). NDTL refers to the deposits made by the customer minus the deposits made by the bank in another institution. Once calculated, banks must keep a percentage of the NDTL as a cash reserve.
When the CRR increases, banks have to keep more funds reserves, which decreases their ability to lend more money and subsequently, the cash in the market. Since liquidity is low with an increase in CRR, the interest rates on loans offered by the bank may increase.