Date of publication: 2017-09-04 14:02
However, phasing out CRR will remove the safety valve that the banks have and will leave them vulnerable like US banks during 7558. They may resort to reckless lending and won 8767 t have adequate capital in case of a bank run. Moreover, it will raise inflation due to increased money supply in the market.
Hence, the central bank is right in its approach of maintaining a safety net against fall even when it comes at cost of slow growth rate
Whereas the function of the CRR is the monitory stability preventing bank run by real and perceived security in the eyes of public of the banking system, the function of SLR is to enhance the liquidity of the Bank assets.
This focus misses the whole point of CRR as something that reinforces the public confidence in Monetory stability and provide conducive condition for banks to lend. What need to be done is to reduce SLR to a very low level. It has resulted in crowding out of private investment, less returns for the banking industry and the households by diverting money from the most productive sectors of the eonomy. The debate to eliminate CRR is totally misplaced.
Cash Reserve Ratio (CRR) is the percentage of its total deposits that each Commercial bank has to deposit with RBI all the time. It is a measure undertaken in order to avoid 8766 Bank Run 8767 . Moreover, it doesn 8767 t earn the banks any interest.
Statutory Liquidity Ratio (SLR) is the percentage of total deposits that the Commercial banks have to keep with themselves in the form of cash and government approved securities. SLR is comparatively higher in India because of government borrowings and sterilization.
SLR (Statutory Liquidity ratio, %) constitutes the reserve kept by the banks in the form of gold, government securities and cash. Some profit can be accrued from it, as it is mostly kept in the form of G-securities.
CRR and SLR are quantitative tools of monetary policy of RBI through which it controls the money supply and thus inflation. CRR is the percentage of NDTL(net deposit and time liability) that commercial banks have to park with RBI and it is mainly in form of cash and no interest is earned on it unlike SLR.
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current slowdown in the economy requires drastic measures to keep India on track. Though CRR phasing out has been on table since long, it is required that RBI phase this out in periodic fashion to examine the effects.
While banks have to forgo some income, it also makes banks abstain from indiscriminate lending which is partly responsible for current NPAs plaguing the banking system
change in CRR shows something is more imminent so ingeneral RBI dont go for CRR change in CRR sends strong signals in the market. markets react with high sensitivity.. so RBI usually deals with RR and RRR
Economists and bankers are in favour of phasing out of CRR because of its dead cash nature. It is just kept out of the circulation in market, leading to shortage of capital which can be used for infrastructure developed. But the present framework is favourable, as the CRR has drastically been reduced since the time of its inception, and can be further reduced in future in face of decreasing inflation and economic stability. Also, it is only a small portion of the total capital held by the banks. If the banks are able to take back money from the defaulters, it will equally help in getting money for infrastructure development.
Rather , by keeping liquidity in short supply through CRR, RBI forces banks to borrow from RBI through the repo window. This allows the RBI to use the repo rate as a signalling rate through which it can PASS ON interest rate hikes and reduction.