What is CRR?
- It is money that banks park with the RBI for free, without receiving any interest on it.
- Currently, CRR is at 4 per cent
- It is calculated as a percentage of each bank’s net demand and time liabilities (NDTL).
- NDTL refers to the aggregate savings account, current account and fixed deposit balances held by a bank.
- With demonetisation and increasing deposits in the Banks, the market interest rate fell from 7% to 6.2%.
- RBI stepped in and hiked the CRR from 4% to 100% of incremental deposits so that the market interest rates don’t fall below the policy repo rate.
What is the need for CRR?
- To allow the RBI to control liquidity and rates in the economy.
- More importantly, it is there to ensure that banks don’t struggle with repayments if there is a sudden rush to withdraw.
- It is to avoid this situation that the RBI specifies both a CRR and an SLR (Statutory Liquidity Ratio) for banks.
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- The CRR (4 per cent of NDTL) requires banks to maintain a current account with the RBI with liquid cash.
- The SLR (20.75 per cent of NDTL) requires banks to invest in safe and quickly saleable assets such as government securities.
Consequences
- Thus, as a depositor, the CRR and SLR requirements together ensure that a fourth of your deposits with Indian banks remain secure, even if banks make poor lending decisions.
- If you are a bond market investor, it is as important to watch the CRR and SLR requirements of the RBI as it is to watch its repo rate actions. It is liquidity that decides the short-term direction of interest rates in the market.
- If you are an investor in bank stocks, a higher CRR means lower margins for the bank and vice versa.