Cash reserve ratio uses and its use by Reserve Bank of India (RBI)


This article explains what Cash Reserve Ratio is and speaks the need of CRR to control the economy of India. This write-up gives details on effects of CRR increase and its decrease. The points are given in easy manner to be understood even who do not have specific knowledge about economy.

Cash Reserve Ratio (CRR)


Cash Reserve Ratio (CRR) is a tool of Reserve Bank of India to maintain monetary policy. It is used from time to time according to its need to control the economic speed in India. Cash Reserve Ratio is a rate of money which is to be kept under the protection of RBI by commercial banks. They have to store their money at RBI with proportionate to their deposits by depositors as per the rate decided by RBI. Before the economic reforms, in 1980, CRR was set at 15%. It was later changed to 5.5% after economic reforms. Present Cash reserve ratio (CRR) is at 6%. RBI does not pay interest on CRR.

What happens if RBI increases CRR?

The money availability at banks will be decreased.
  • Interest rates will be increased.
  • Availability of money can be difficult.
  • Depositor can get benefit out of the situation as rate of interest is increased.

    Why does RBI use Cash Reserve Ratio (CRR)?


    For the stability of economy


    RBI uses CRR to control the money supply in market. Economic growth is needed. But high speed may cause economic damages. There should be control all the time. Money supply can be curbed with the increasing of Cash Reserve Ratio (CRR). Increase and decrease of CRR controls the money supply in the market.

    To curb inflation


    In inflationary times money supply is high which leads to greater demand and raises the cost of all goods. In order to diminish the effect, RBI increases the CRR which reduce money supply in market and control the inflation.

    To provide employment


    Decreasing of CRR enables get loans for the youth with less interest rates compared to high rates at the time of increased CRR, can enable them have self employment opportunities. Banks can provide more money to self help groups as money availability is more when CRR is decreased.

    To support sectors


    CRR decrease enables banks provide more money to agriculture as they have quota which is to be given to provide loans for farmers. If CRR is increased, this can be low. This can be the same in the case of industries.

    Conclusion
    RBI as per need, it decreases and increases the CRR. CRR increase and decrease will have effect on entire economy. It may reduce the growth rate due to non availability of money.


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