THE CRR RATIO

• It is a bank regulation that sets the minimum reserves each bank must hold byway of customer deposits and notes.

• These deposits are designed to satisfy each withdrawal demands of customers.

• Deposits are normally in the form of currency stored in a bank vault or with the Central bank like RBI.

• CRR is also called the liquidity ratio as it seeks to control money supply in the economy.

• CRR is used as a tool in monetary policy, in influencing the country’s economy, borrowing and interest rates.

• CRR works like brakes on the economy’s money supply.

• CRR requirements effect the potential of the banking system to create higher or lower money supply.

• For example say…the CRR is pegged by RBI at 10%... If a bank receives RS 1000 as deposit then they can lend Rs.900/-as a loan and will have to keep a balance of Rs.100/- in the customers deposit account.

• Now a borrower who received Rs.900/- as a loan will deposit the same in his bank.

• The borrower bank will now lend out Rs.810/- and keep Rs.90/- in his deposit account.

• As this process continues, the banking system can expand the initial deposit of Rs.1000/- into a maximum of Rs.10000/- ( Rs.1000+Rs.900+Rs.810...= Rs.10000).

• The higher the CRR ratio the lower the money available for lending.

• This reduces the credit expansion by controlling the amount of money that goes out by way of loans.

• This directly effects money creation process and in turn effects economic activity.

• CRR is increased to bring down inflation which happens due to excessive spending power.
• Spending

• Spending power is augmented by loans-If the money goes out s loans is controlled, inflation can be tamed to some extent.

• A lower CRR allows the bank to lend more money and will fuel consumption and spending.

• Conversely, if the government wants to stimulate higher economic activity and encourage higher spending to achieve economic growth, they will lower CRR.

• Thus banks indirectly enjoy the power to create more money

ALL ABOUT JRGONS

 We live in a word that is rapidly changing and evolving . However, in this change one  truth remains constant.  That is the need to save money and deploy it in a manner which help us earn adequate returns linked to the risk we wish to take. As we start examining and studying this discipline of savings and deployment and return , we are often confronted with terms and ‘jargons’ we don’t understand.       

                                                                                                                                                                     

The science of finance is  littered with terms like ‘hedging,fiscal deficit, indexation’ etc. To many of us the ring of these words  produces alien sounds. This attempt is from the desire to make life simpler for those  individuals  who wishes to explore the world of finance on his/her own.