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BANKING AND MONETARY POLICY — Economics STD 12 Commerce — Question

Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsBANKING AND MONETARY POLICY5 Marks
Question
Explain $\text{CRR}$ and $\text{SLR}$ in detail.
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Answer

$1.$ Cash Reserve Ratio $\text{(CRR):}$
  • Under the $\text{RBI}$ Act, $1934,$ all commercial banks have to keep certain minimum cash reserves with the $\text{RBI}$.
  • Cash Reserve Ratio is the specified percentage of the total deposits of customers of the commercial bank that the bank has to maintain with the $\text{RBI}$.
  • Initially $\text{CRR}$ was decided to be $5\%$ of demand deposits and $2\%$ of term deposits.
  • Since $1962, \text{CRR}$ is variable from $3\%$ to $15\%$ of the total deposits of individual banks.
  • The main reason behind the cash reserves of commercial banks is to have enough liquidity in the market.
  • The increase or decrease in the rate of $\text{CRR}$ directly effects controlling inflation and deflation respectively.
  • Higher $\text{CRR}$ leads to more reserve with $\text{RBI}$. This lessens the total deposits of the commercial banks which forces them to provide less credit/loan to people.
  • Due to less credit in the economy, people have less supply of money which in turn controls the inflation and increases economic stability.
$2.$ Statutory Liquidity Ratio $\text{(SLR):}$
  • Statutory Liquidity Ratio is the percentage of total deposits $(25\%$ or more$)$ that the commercial banks have to maintain with $\text{RBI}$ in form of cash, gold and government-approved securities.
  • If the $\text{SLR}$ is high, instead of banks giving loans and advances to customers, it will buy government securities.
  • These government securities help $\text{RBI}$ to fulfill the government expenses. A high $\text{SLR}$ reduces the capacity of banks to give loans to customers thereby, reducing the supply of credit/money in the economy,
  • A low $\text{SLR}$ increases the capacity of banks to give loans thus increasing credit creation in the economy.

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