Cash Reserve Ratio (CRR)
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and private sector banks, foreign banks, regional rural banks and co-operative | and private sector banks, foreign banks, regional rural banks and co-operative | ||
banks) are required to maintain a cash balance on average with the RBI on a | banks) are required to maintain a cash balance on average with the RBI on a | ||
| − | fortnightly basis to cater to the CRR requirement. With effect from December 28, | + | fortnightly basis to cater to the CRR requirement. Non Bank Financial |
| − | 2002 all banks | + | Corporations (NBFCs) are outside the purview of this reserve requirement. Act also authorizes RBI to stipulate an additional or incremental CRR, which, however, has not been put in place by RBI. </p> |
| − | average daily CRR on <i>all</i> days of the fortnight. | + | |
| − | + | <p>Banks have to maintain 100 percent CRR ''on an average'' basis during the fortnight. That is, it is not necessary that on all days CRR has to be at 100%. With effect from December 28, | |
| + | 2002 all banks were required to maintain a minimum of 70 per cent of the required | ||
| + | average daily CRR on <i>all</i> days of the fortnight. Later, with effect from the fortnight beginning September 21, 2013 entities were required to maintain minimum CRR balances up to 95 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight. This was later reduced to 90 per cent with effect from the fortnight beginning April 16, 2016.</p> | ||
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<p>Traditionally, the amount held to cater to the CRR requirement was stipulated | <p>Traditionally, the amount held to cater to the CRR requirement was stipulated | ||
to be no lower than 3 percent and no higher than 20 percent of the total NDTL | to be no lower than 3 percent and no higher than 20 percent of the total NDTL | ||
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the domestic money market, the CRR assumed importance as one of the important | the domestic money market, the CRR assumed importance as one of the important | ||
quantitative tools aiding in liquidity management. In contrast to the Liquidity | quantitative tools aiding in liquidity management. In contrast to the Liquidity | ||
| − | Adjustment Facility (LAF), which aids liquidity management on a daily basis via | + | Adjustment Facility [http://www.arthapedia.in/index.php?title=Liquidity_Adjustment_Facility_(LAF) (LAF)], which aids liquidity management on a daily basis via |
changes in repo and reverse-repo rates, changes in the CRR is aimed at the same | changes in repo and reverse-repo rates, changes in the CRR is aimed at the same | ||
in the medium term.</p> | in the medium term.</p> | ||
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global financial crisis. The cut continued through 2008 reaching a level of 5 | global financial crisis. The cut continued through 2008 reaching a level of 5 | ||
percent in January 2009. The CRR was maintained at this level throughout 2009 | percent in January 2009. The CRR was maintained at this level throughout 2009 | ||
| − | and eventually raised to 6 percent in April, 2010.</p> | + | and eventually raised to 6 percent in April, 2010. Effective from the fortnight beginning February 09, 2013, the CRR is prescribed at |
| + | 4%. CRR, as on April 2016 stands at 4%.</p> | ||
<p>A country that uses the CRR aggressively to control domestic liquidity and | <p>A country that uses the CRR aggressively to control domestic liquidity and | ||
| − | target the monetary roots of inflation is China | + | target the monetary roots of inflation is China.</p> |
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<p>The RBI website (www.rbi.org.in) carries information on the prevailing policy | <p>The RBI website (www.rbi.org.in) carries information on the prevailing policy | ||
| − | rates including CRR | + | rates including CRR. Various publications |
by the RBI, including monthly bulletins, discuss and analyze rationale behind | by the RBI, including monthly bulletins, discuss and analyze rationale behind | ||
changes and expected effects of CRR changes as and when the need arises.</p> | changes and expected effects of CRR changes as and when the need arises.</p> | ||
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| + | == Also See== | ||
| + | *[http://www.arthapedia.in/index.php?title=Statutory_Liquidity_Ratio Statutory Liquidity Ratio (SLR)] | ||
| + | *[http://www.arthapedia.in/index.php?title=Marginal_Standing_Facility Marginal Standing Facility (MSF) ] | ||
| + | *[http://www.arthapedia.in/index.php?title=Liquidity_Adjustment_Facility_(LAF) Liquidity Adjustment Facility (LAF)] | ||
| + | *[http://arthapedia.in/index.php?title=Base_Rate Base Rate] | ||
| + | *[http://arthapedia.in/index.php?title=Market_Stabilization_Scheme_(MSS) Market Stabilization Scheme (MSS)] | ||
| + | *[http://arthapedia.in/index.php?title=Policy_Rate Policy Rate] | ||
| + | *[http://arthapedia.in/index.php?title=Bank_Rate Bank Rate] | ||
| + | *[http://arthapedia.in/index.php?title=Interest_rate_corridor Interest Rate Corridor] | ||
| + | *[http://arthapedia.in/index.php?title=Repo_Rate_and_Reverse_Repo_Rate Repo and Reverse Repo Rate] | ||
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==Contributed by== | ==Contributed by== | ||
* [http://www.ies.gov.in/myaccount-profile-view.php?memid=359 Rangeet Ghosh, IES(2008)] | * [http://www.ies.gov.in/myaccount-profile-view.php?memid=359 Rangeet Ghosh, IES(2008)] | ||
| + | *Email- [mailto:rangeetghosh1980@yahoo.co.in rangeetghosh1980@yahoo.co.in] | ||
[[Category:concepts|CashReserveRatio]] | [[Category:concepts|CashReserveRatio]] | ||
Latest revision as of 17:03, 12 May 2016
Cash Reserve Ratio refers to the fraction of the total Net Demand and Time Liabilities (NDTL) of a Scheduled Commercial Bank held in India, that it has to maintain as cash deposit with the Reserve Bank of India (RBI). The requirement applies uniformly to all banks in the country irrespective of an individual bank’s financial situation or size. In contrast, certain countries e.g. China stipulates separate reserve requirements for ‘large’ and ‘small’ banks.
As per the RBI Act 1934, all Scheduled Commercial Banks (that includes public and private sector banks, foreign banks, regional rural banks and co-operative banks) are required to maintain a cash balance on average with the RBI on a fortnightly basis to cater to the CRR requirement. Non Bank Financial Corporations (NBFCs) are outside the purview of this reserve requirement. Act also authorizes RBI to stipulate an additional or incremental CRR, which, however, has not been put in place by RBI.
Banks have to maintain 100 percent CRR on an average basis during the fortnight. That is, it is not necessary that on all days CRR has to be at 100%. With effect from December 28, 2002 all banks were required to maintain a minimum of 70 per cent of the required average daily CRR on all days of the fortnight. Later, with effect from the fortnight beginning September 21, 2013 entities were required to maintain minimum CRR balances up to 95 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight. This was later reduced to 90 per cent with effect from the fortnight beginning April 16, 2016.
Traditionally, the amount held to cater to the CRR requirement was stipulated to be no lower than 3 percent and no higher than 20 percent of the total NDTL held in India. However, the RBI (amendment) Act, 2006 provides for removal of the floor and ceiling with respect to setting the CRR and authorizes the RBI to set the ratio in keeping with the broad objective of maintaining monetary stability in the economy.
Presently, banks are not paid any interest on behalf of the RBI for parking the required cash. If a bank fails to meet its required reserve requirements, the RBI is empowered to impose a penalty by charging a penal interest rate.
Historically, the CRR was mooted as a regulatory tool. However, over the years and especially after the liberalization of the Indian economy in the early 1990s, with the economy experiencing substantial inflows of capital exerting stress on the leverage of the central bank to manipulate liquidity conditions in the domestic money market, the CRR assumed importance as one of the important quantitative tools aiding in liquidity management. In contrast to the Liquidity Adjustment Facility (LAF), which aids liquidity management on a daily basis via changes in repo and reverse-repo rates, changes in the CRR is aimed at the same in the medium term.
The CRR was reduced from a level of 8.5 percent in August 2008 to 6 percent in September, 2008 to ease liquidity in domestic markets on the face of the global financial crisis. The cut continued through 2008 reaching a level of 5 percent in January 2009. The CRR was maintained at this level throughout 2009 and eventually raised to 6 percent in April, 2010. Effective from the fortnight beginning February 09, 2013, the CRR is prescribed at 4%. CRR, as on April 2016 stands at 4%.
A country that uses the CRR aggressively to control domestic liquidity and target the monetary roots of inflation is China.
The RBI website (www.rbi.org.in) carries information on the prevailing policy rates including CRR. Various publications by the RBI, including monthly bulletins, discuss and analyze rationale behind changes and expected effects of CRR changes as and when the need arises.
Also See
- Statutory Liquidity Ratio (SLR)
- Marginal Standing Facility (MSF)
- Liquidity Adjustment Facility (LAF)
- Base Rate
- Market Stabilization Scheme (MSS)
- Policy Rate
- Bank Rate
- Interest Rate Corridor
- Repo and Reverse Repo Rate
References
“Central Bank Balances and Reserve Requirements”, Simon Gray, IMF Working Paper No. WP/11/36, February, 2011.</p>
