Also: CRR, SLR, cash reserve ratio, statutory liquidity ratio
Definition
The cash reserve ratio (CRR) is the share of a bank's net demand and time liabilities (mainly deposits) that it must keep as cash balances with the Reserve Bank of India, earning no interest. The statutory liquidity ratio (SLR) is the share that it must hold in safe, liquid assets such as government securities, cash and gold. Both are tools of the RBI to manage liquidity and ensure bank safety.
Deep-dive lesson:Money, Banking and Inflation. This page is a quick reference that connects the term across subjects; read the lesson for the full treatment.
Economists sometimes describe the high reserve requirements of the past as a hidden tax on savers, because banks paid lower deposit rates to compensate for idle or low-yield reserves. Reducing these pre-emptions was a key step in allowing interest rates to be set by markets rather than by administrative decisions.
Every bank lends out most of the money depositors place with it, keeping only part as reserves. If too little is kept, the bank may not be able to meet withdrawals, and if all banks lend aggressively, money supply and prices can rise quickly. Central banks therefore require banks to hold reserves. In India, the CRR and SLR were once very high: in the early 1990s, CRR was around 15% and SLR close to 38.5%, so a large part of bank deposits was effectively pre-empted to finance the government and control money supply. This "financial repression" limited credit to the private sector.
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