Why in the News?

• The Reserve Bank of India (RBI) began its three-day monetary policy review.
  • There is increasing speculation that the RBI may announce a cut in the Cash Reserve Ratio (CRR) to ease liquidity pressures.

What is Cash Reserve Ratio (CRR)?

• CRR is the percentage of a bank’s total deposits that it must maintain as liquid cash with the Reserve Bank of India (RBI) as a reserve.
• It is a tool used by the RBI to manage inflation and check excessive lending by banks.
  • It serves as a safety net during times of banking stress, ensuring banks have enough liquidity for day-to-day operations.
• As of now, the CRR is set at 4.5% of a bank’s Net Demand and Time Liabilities (NDTL).
• Banks do not earn interest on the amount they maintain as CRR with the RBI.
• CRR Requirements for Different Types of Banks:
  • Scheduled Commercial Banks (SCBs): Includes Public Sector Banks (PSBs), Private Sector Banks (PVBs), Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Payments Banks, Primary (Urban) Co-operative Banks (UCBs), State Co-operative Banks (StCBs), and District Central Co-operative Banks (DCCBs).
  • Non-Scheduled Co-operative Banks & Local Area Banks: They must maintain CRR with themselves or with the RBI.
• Restrictions on CRR Funds
  • Banks cannot lend the funds held as CRR to corporates or individual borrowers.
  • The money held under CRR cannot be used for investment purposes by the bank.
  • No Interest is earned on the funds maintained as CRR by banks with the RBI.

Impacts of Declining CRR on the Economy

• Positive Impacts: 

• • Increased Bank Liquidity: A reduction in CRR frees up more funds for banks, improving credit availability and promoting investment and consumption.
  • Stimulus for Economic Growth: With more funds to lend, businesses can secure loans more easily, boosting economic activity and encouraging growth across sectors.
  • Lower Interest Rates: As banks have more liquidity, they may lower interest rates on loans, making credit cheaper and encouraging investment and consumer spending.

• Negative Impacts: 

• • Potential Inflationary Risks: Increased lending and spending can raise demand, which, if not matched by supply, can lead to inflationary pressures in the economy.
  • Asset Bubbles: Excess liquidity may result in overvalued assets like stocks or real estate, creating the risk of unsustainable price increases and potential market instability.

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