CRR, or cash reserve
ratio, refers to the portion of deposits that banks have to maintain with RBI.
This serves two purposes. First, it ensures that a portion of bank deposits is
totally risk-free. Second, it enables RBI control liquidity in the system, and
thereby, inflation. Besides CRR, banks are required to invest a portion (25 per
cent now) of their deposits in government securities as a part of their
statutory liquidity ratio (SLR) requirements. The government securities (also
known as gilt-edged securities or gilts) are bonds issued by the Central
government to meet its revenue requirements. Although the bonds are long-term
in nature, they are liquid as they have a ready secondary market.
From time to time, RBI
prescribes a CRR, or the minimum amount of cash that banks have to maintain
with it. The CRR is fixed as a percentage of total deposits. The latest hike in
the CRR was in Oct-2007 where the RBI increased the CRR by 50bp to 7.5%. The
deposits earn around 4 per cent interest, which is less than half of the
average cost of funds for banks. The
CRR hike will suck out Rs 16,000 crore of liquidity from the banking system.
No comments:
Post a Comment