Mcom Part 2_RM Project

8/12/2019 Mcom Part 2_RM Project

1/37

1

1. INTRODUCTION:

CASH RESERVE RATIO:

The reserve requirement (orcash reserve ratio ) is a central bankregulation thatsets the Minimum fraction of customer deposits and notesthat each commercial bankmust hold as reserves(rather than lend out). Theserequired reserves arenormally in the form of cashstored physically in a bank vault(vault cash) ordeposits made with a central bank.

The required reserve ratio is sometimes used as a tool in monetary policy,

influencing the country's borrowing and interest rates by changing the amount offunds available for banks to make loans with. Western central banks rarely alter threserve requirements because it would cause immediate liquidity problems fo banks with low excess reserves, they generally prefer to use open marketoperations(buying and selling government-issued bonds) to implement their

monetary policy. The People's Bank of Chinauses changes in reserve requirements

as an inflation-fighting tool, and raised the reserve requirement ten times in 2007and eleven times since the beginning of 2010.An institution that holds reserves inexcess of the required amount is said to hold excess reserves. CRR is the amount of funds that the banks have to keep with the RBI. If the centra bank decided to increase the CRR, the available amount with the banks comesdown. The RBI uses the CRR to drain out excessive money from the system/Scheduled banks are required to maintain with the RBI an average cash balance,the amount of which shall not be less than 4% of the total of the Net Demand andtime liabilities (NDTL), on a fortnightly basis.
http://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Promissory_notehttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Bank_reserveshttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Bank_vaulthttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Excess_reserveshttp://en.wikipedia.org/wiki/Open_market_operationhttp://en.wikipedia.org/wiki/Open_market_operationhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/People%27s_Bank_of_Chinahttp://en.wikipedia.org/wiki/Excess_reserveshttp://en.wikipedia.org/wiki/Excess_reserveshttp://en.wikipedia.org/wiki/People%27s_Bank_of_Chinahttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Open_market_operationhttp://en.wikipedia.org/wiki/Open_market_operationhttp://en.wikipedia.org/wiki/Excess_reserveshttp://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Bank_vaulthttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Bank_reserveshttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Promissory_notehttp://en.wikipedia.org/wiki/Central_bank


2/37

2

Definition:

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits ocustomers, which commercial banks have to hold as reserves either in cash or adeposits with the central bank. CRR is set according to the guidelines of the centra bank of a country.

Statutory liquidity ratio

Statutory liquidity ratio refers to the amount that the commercial banks require tomaintain in the form of gold or govt. approved securities before providing credit tthe customers.Here by approved securities we mean, bond and shares ofdifferent companies. Statutory Liquidity Ratio is determined and maintained bythe Reserve Bank of India in order to control the expansion of bank credit. It is

determined as percentage of total demand and time liabilities. Time Liabilitierefer to the liabilities, which the commercial banks are liable to pay to thecustomers after a certain period mutually agreed upon and demand liabilities arsuch deposits of the customers which are payable on demand. example of timeliability is a fixed deposits for 6 months, which is not payable on demand but aftesix months. example of demand liability is deposit maintained in saving account ocurrent account, which are payable on demand through a withdrawal form of acheque. SLR is used by bankers and indicates the minimum percentage of depositthat the bank has to maintain in form of gold,cash or other approvedsecurities.Thus, we can say that it is ratio of cash and some other approvedliabilities(deposits). It regulates the credit growth in India


3/37

3

The liabilities that the banks are liable to pay within one month's time, due tocompletion of maturity period, are also considered as time liabilities. Themaximum limit of SLR is 40% and minimum limit of SLR is 23% In India

Reserve Bank of India always determines the percentage of SLR. There are somstatutory requirements for temporarily placing the money in government bondsFollowing this requirement, Reserve Bank of India fixes the level of SLR. A present, the minimum limit of SLO that can be set by the Reserve Bank is23% ASON AUGUST 2012 .

Statutory Liquidity Ratio (SLR)

SLR stands for Statutory Liquidity Ratio. Apart from CRR, every bank is requireto maintain in India at the close of business every day, a minimum proportion otheir Net Demand and Time Liabilities as liquid assets in the form of cash, goldand un-encumbered approved securities. The ratio of liquid assets to demand antime liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 23%(Reduced w.e.f. 11/08/2012 from earlier 24%). RBI is empowered to increase thiratio up to 40%. An increase in SLR also restricts the banks leverage position to pump more money into the economy. In the event of SCBs SLR holdings fal below the statutory requirement upto 2% of their DTL, they can avail the MarginaStanding Facility (MSF) upto 2% of their net DTL outstanding at the end of thsecond proceeding fortnight and they will not have the obligation to seek specifiwaiver of the default in SLR compliance arising out of use of this facility (w.e.f

17.04.12). The liquid assets include cash or Gold valued at a price not exceedinthe current market price or investment in Statutory Liquidity Ratio (SLR)

securities viz.

a) Dated securities issued up to 06.05.2011 (Detailed in RBI notification of date).


4/37

4

b) Treasury Bills of GOI

c) Dated securities of the Government of India issued from time to time under thmarket borrowing programme* and the Market Stabilization Scheme

d) State Development Loans (SDLs) of the State Governments issued from time ttime under the market borrowing programme; and

e) Any other instrument as may be notified by the Reserve Bank of India.

* Market borrowing programme refers to domestic rupee loans raised by GOI an

State Governments from the public and managed by the RBI. provided that thsecurities (including margin) are not acquired under RBI Liquidity AdjustmentFund (LAF). Encumbered SLR securities shall not be included for the purpose ocomputing the percentage specified above. Provided that for the purpose ocomputing the percentage of assets referred to hereinabove, the following shall bincluded, namely:

Securities lodged with another institution for an advance or any other credit

arrangement to the extent to which such securities have not been drawn against oavailed of.

Securities of fered as collateral to the RBI for availing liquidity assistance fromMarginal Standing Facility (MSF)

The deposit required under sub -section (2) of Section 11 of the BankingRegulation Act 1949 to be made with the Reserve Bank by a banking companyincorporated outside India.


5/37


6/37

6

2. Procedure for Computation of SLR/Penalty

The procedure to compute total NDTL for the purpose of SLR under Section 24 (2

(B) of B.R. Act, 1949 is broadly similar to the procedure followed for CRR.

SCBs are required to include inter -bank term deposits / term borrowing liabilitiesof all maturities in Liabilities to the Banking System. Similarly, inter -bank assetsof term deposits and term lending of all maturities in Assets with the Banking

System for computation of NDTL for SLR purpose.

Default in maintenance of the required amount of SLR attracts penalty at at therate of 3% p.a. above the Bank Rate on the shortfall and if the default continues othe next succeeding working day, the penal interest may be increased to a rate o5% p.a. above the Bank Rate for the concerned days of default on the shortfall.

SCBs are required to submit to RBI before 20th of every month a return (For

VIII) showing the amount of SLR held on alternate Fridays during immediat

preceding month with particulars of their DTL in India on such Fridays (Publiholidays preceding working day). The Statutory Auditors should verify and certif

that all items of outside liabilities, as per banks books had been duly complied bythe bank and correctly reflected under DTL/NDTL in the fortnightly/monthlystatutory returns submitted to RBI.


7/37

7

3. Effects on money supply

The reserve requirement can be used as an instrument of monetary policy, becausthe higher the reserve requirement is set, the less funds banks will have to loan ouleading to lower money creation and perhaps ultimately to higher purchasing power of the money previously in use. The effect is multiplied, because moneyobtained as loan proceeds can be re-deposited; a portion of those deposits mayagain be loaned out, and so on. The effect on the money supply is governed

by the following formulas:

: definitional relationship between monetary base Mb (bank reserves plus currency held by the non-bank public) thenarrowly defined money supply, M1,

: derived formula for the money multipliermm,the factor by which lending and re-lending leads M1 to be a multiple of themonetary base:

where notationally,the currency ratio: the ratio of the public's holdings of currency

(undeposited cash) to the public's holdings of demand deposits; and

the total reserve ratio (the ratio of legally required plus non-requiredreserve holdings of banks to demand deposit liabilities of banks).

However, in the United States (and other countries except Brazil,

China, India, Russia), the reserve requirements are generally notfrequently altered to implement monetary policy because of theshort-term disruptive effect on financial markets.
http://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Money_multiplierhttp://en.wikipedia.org/wiki/Demand_deposithttp://en.wikipedia.org/wiki/Demand_deposithttp://en.wikipedia.org/wiki/Money_multiplierhttp://en.wikipedia.org/wiki/Money_supply


8/37

8

Jaromir Benes and Michael Kumhof of the IMF ResearchDepartment, report that: the deposit multiplierof the undergraduateeconomics textbook, where monetary aggregates are created at the

initiative of the central bank, through an initial injection of high- powered money into the banking system that gets

multiplied through bank lending, turns the actual operation of themonetary transmission mechanism on its head.

Most times when banks ask for replenishment of depleted reserves,the central bank obliges. Reserves therefore impose no constraints as

the deposit multiplier is simply, in the words of Kydland and Prescott(1990), a myth. And because of this, private banks are almost fully incontrol of the money creation process.


9/37

9

4. Economic impact of CRR hike on public sector deposits

The Central Bank of Nigeria (CBN), under Governor Sanusi Lamido Sanusi, lasweek took aim at the easy money at the disposal of Nigerian banks, as the apex bank introduced a 50 percent Cash Reserve Requirement (CRR) on public sectodeposits.

The higher CRR, which is the minimum balance the banks are expected to keepwith the apex bank, is a tightening measure intended to check the present excesliquidity in the banking industry and stem the crowding out effect on private secto borrowing, as well as pre-empt potential increased government spending in thrun-up to the 2015 elections.

The policy will apply to all deposits from the federal, state and local governmenton the balance sheets of banks. The move represents a significant tightening, givethe traditional reliance of the Nigerian banking system on public-sector deposits.

Public sector funds in the banking sector currently stand at N2.5 trillion, equivalento17 percent of the banking sectors deposits. It is expected that an additional N520 billion will become quarantined from the banking system as a result of the CBNmove.

The economic impact of the CBN move is expected to be multi-faceted, althoug

the length of the impact may be short term.Analysts say the CBN move may result in N45 billion ($281m) of lost interesincome for Nigerias banking industry.


10/37

10

Putting that in context, the cumulative pre-tax profit of the top 15 deposit money banks (DMB) for full year 20 12 rose 488.7 percent to N569.1 billion ($3.6bn),meaning the CRR hike may lead to an 8 percent loss in income for banks, based o

2012 numbers.


11/37

11

5. How the rate is determined and its impact on the

economy

The interest rate that is charged by acountrys central or federal bank on loans andadvances to control money supply in the economy and the banking sector. This itypically done on a quarterly basis to control inflation and stabilize the countrys

exchange rates. A fluctuation in bank rates triggers a ripple-effect as it impactevery sphere of a countrys economy. For instance, the prices in stock markets tend

to react to interest rate changes. A change in bank rates affects customers as i

influences prime interest rates for personal loans. It is the rate at which centra bank provides to the commercial bank for the excess reserves being kept with thcentral bank.

Bank rate and Inflation:

The bank rate is maintained in such a way that it is able to check. When the interesrates escalate, it means that people will borrow less, expenses will be less andtherefore amount saved will be more. Owing to this tendency, there is less moneyin the market, which checks inflation to a great extent.

A range, which is referred to as the "operating band", is established by the bankrate. This can cause the rate at which the loan is shelled out to change drasticallyIn fact, the so-called "overnight lending rate" may fluctuate a lot.

In this context, it may be mentioned that "overnight lending rate" refers to the ratewhich is applied when various financial institutions lend as well as borrow moneyfrom each other on a one day basis.


12/37

12

Bank Rate and the Central Bank:

Changes in the bank rate and consequently the operating band are mainly trigerred by the Central Bank. By altering (increasing or decreasing) the bank rate, thecourse of action, which is likely to be taken by the Central Bank, is manifestedThis applies for the short-term rates of interest.

Bank rate and its Impact:

Changes brought about in the bank rate means the prime rate is also likely tochange. Prime rate is the interest rate, which the financial institutions impose onthe customers pertaining to savings

rates and other loans. Alterations in the bank rate affects interest rates on varioufinancial instruments like deposits, investment certificates. Certain types of loanare also impacted-car loans, business loans and mortgage loans to name a few.

Working of the Bank Rate

This section will answer how Bank Rate policy operates to control the level of prices and business activity in the country.

Changes in bank rate are introduced with a view to controlling the price levels and business activity, by changing the demand for loans. Its working is based upon the principle that changes in the bank rate results in changed interest rate in the marke

Suppose a countryis facing inflationary pressure. The Central Bank, in suchsituations, will increase the bank rate thereby resulting to a hiked lending rate. Thiincrease will discourage borrowing. It will also lead to a fall in the businessactivity due to following reasons.
http://en.wikipedia.org/wiki/Countryhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Country


13/37

13

Employment of some factors of production will have to be reduced bythe businessmen.

The manufacturers and stock exchangedealers will have to liquidate their

stocks, which they held through bankloans, to pay off their loans. The effect of Rise in Bank Rate by the Central Bankis shown in the chart (leftside). Hence, we can conclude that hike in Bank Rate leads to fall in priceleveland a fall in the Bank Rate leads to an increase in price leveli.e. they sharean inverse relationship.
http://en.wikipedia.org/wiki/Businessmenhttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Loanshttp://en.wikipedia.org/wiki/Central_Bankhttp://en.wikipedia.org/wiki/Price_levelhttp://en.wikipedia.org/wiki/Price_levelhttp://en.wikipedia.org/wiki/Price_levelhttp://en.wikipedia.org/wiki/Price_levelhttp://en.wikipedia.org/wiki/Price_levelhttp://en.wikipedia.org/wiki/Price_levelhttp://en.wikipedia.org/wiki/Central_Bankhttp://en.wikipedia.org/wiki/Loanshttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Businessmen


14/37

14

6. Impact of interest rates and inflation:

What impact does monetary policy have on the different interest rates in theeconomy and what effects it has got on the inflation rate? The RBI doesn't directlycontrol these interest rates but in general a tighter monetary policy leads to higherinterest rates.

So how do interest rates affect the rise and fall of inflation? Higher interest rates put less borrowing power in the hands of consumers (business).Thus consumersspend less; the demand slows down, thereby controlling inflation. If the RBIdecides that the economy is slowing down

that demand is slowing down-then it can reduce interest rates, incresing the amounof cash entering the economy (consumers/business).

Let us understand some of the concepts

Monetary Policy-Interest rates (RBI, Bank rate, reverse repurchase rate,repurchase rate, cash reserve ratio CRR, Net demand and time liabilities NDTL, M3).

Inflation (WPI,CPI) Relationsip between Monetary Policy and Inflation.

Thus the objective of the recent policy measures is to control the inflationarytendancy by increasing the interest rates.


15/37

15

7. Limitations:

CRR:

The following are the limitations of the method of variable cash reserve ratio:

(i) This method is not effective when the commercial banks keep very largeexcessive cash reserves. In such a case ever if cash reserve 'ratio is raisedample reserves remain after satisfying the minimum requirements.

(ii) This method is not effective when the commercial banks happen to possess large foreign funds. Thus, even if the central bank reduces thereserves by raising the cash reserve ratio, these banks will continue tocreate credit on the basis of the foreign funds.

(iii) This method is appropriate only when big changes in the reserves of thecommercial banks are required. It. is not suitable for marginaladjustments in the reserves of the commercial banks.

(iv) The effectiveness of this method also depends upon the general mood ofthe business community in the economy. A decrease in the cash reserveratio may not be able to expand credit during depression because of lowfuture expectations of the investors.

(v) This method is discriminatory in nature. It discriminates in favour of the

big commercial banks which, because of their better position, are notmuch affected by the changes in the cash reserve ratio as compared withsmall banks.


16/37

16

(vi) Frequent changes in the cash reserve ratio are not desirable. They createconditions of uncertainty for the commercial banks.

(vii) This method affects only the commercial banking system of the country.The non-banking financial institutions are not required to maintain cashreserves with the central bank.

(viii) It is the most direct and immediate method of credit control and thereforehas to be used very cautiously by the central bank. A slight carelessnessin its use may produce harmful results for the economy.

(ix) This method may have depressing effect on the securities market. Thehigher cash reserve requirements may lead the commercial banks to sellthe securities in hand 3 which, in turn, will reduce their prices in themarket.

Limitations of Bank Rate Policy

Limitations of bank rate policy For the successful working of this policy, a littlereflection will show that a number of circumstances have to be satisfied: (i)Efficacy of bank rate in regulating credit needs a closer association among the bank rate and other rates of interest in the market. Changes in the bank rate must bfollowed by changes in the market rates.

For the successful working of this policy, a little reflection will show that a numbeof circumstances have to be satisfied:


17/37

17

(i) Efficacy of bank rate in regulating credit needs a closer association among the bank rate and other rates of interest in the market. Changes in the bank rate must bfollowed by changes in the market rates. This presupposes the existence of a highl

organized money market. Unfortunately, most countries do not have organizedmoney markets.

(ii) No surplus reserves. The requirement for commercial banks to advance theReserve bank for rediscounting is a significant aspect in shaping the thrivingfunctioning of the bank rate. But commercial banks will not require approachingthe Reserve bank when they have sufficient liquid assets at their disposal, i.e, when

they have enough excess reserves.

(iii) The proper functioning of the bank rate policy presumes a flexible economicorganization so that alterations in credit circumstances ought to lead to equivalentchanges in rents, wages, trade, production, etc.

(iv) The psychological reactions to a change in the bank rate should also be

considered for the effectiveness of the bank rate policy. If in a boom period, businessmen are unduly optimistic, their demand for credit will be interest-inelastiand the bank rate will be ineffective. Similarly, during depression, the pessimismof businessmen will not consider low interest rate as incentive.

It is true that businessmen are influenced by rates of interest, but they are moreinfluenced by business expectations.

(v) The axiom that a rise in bank rate, and thus a rise in interest rates payable ondeposits by commercial banks, will cause an increase in bank deposits isquestionable. A large majority of people save with precautionary motive and theirsavings depend upon their capacity to save, i.e., their income. These savers do not


18/37

18

look for a rise in the interest rates on deposits, but they deposit usually with banksfor the purpose of safety. Thus, it is actually the increase in income rather thaninterest rates that promotes savings by the people and thus augments bank deposits

(vi) The eligibility for rediscounting bills by the central bank presupposes, in theoperation of bank rate policy, a soundly developed bill market. Under-developed bill markets, thus, set a limitation on bank rate operations.


19/37

19

8. OBJECTIVES FOR MAINTAINING THE SLR

RATIO:

to control the expansion of bank credit. By changing the level of SLR, theReserve Bank of India can increase or decrease bank credit expansion.

to ensure the solvencyof commercial banks. to compel the commercial banks to invest in government securities like government bonds.

If any Indian bank fails to maintain the required level of Statutory Liquidity Ratiothen it becomes liable to pay penalty to Reserve Bank of India. The defaulter ban

pays penal interestat the rate of 3% per annum above the Bank Rate, on theshortfall amount for that particular day.

But, according to the Circular, released by the Department of Banking Operationand Development, Reserve Bank of India; if the defaulter bank continues to defauon the next working day, then the rate of penal interest can be increased to 5% peannum above the Bank

Rate. This restriction is imposed by RBI on banks to make funds available tocustomers on demand as soon as possible. Gold and government securities (ogilts) are included along with cash because they are highly liquid and safe assets.

The RBI can increase the SLR to contain inflation, suck liquidity in the market, ttighten the measure to safeguard the customers money. In a growing economy banks would like to invest in stock market, not in government securities or gold athe latter would yield less returns. One more reason is long term governmensecurities (or any bond) are sensitive to interest rate changes. But in an emergingeconomy interest rate change is a common activity.
http://en.wikipedia.org/wiki/Penal_interesthttp://en.wikipedia.org/wiki/Penal_interest


20/37

20

Statutory liquidity ratio is the amount of liquid assets such as precious metals(gold) or other

approved securities that a financial institution must maintain as reserves other than

the cash. The

statutory liquidity ratio is a term most commonly used in India.

The objectives of SLR are to restrict the expansion of bank credit.

1. To augment the investment of the banks in government securities.

2. To ensure solvency of banks. A reduction of SLR rates looks eminent to

support the credit growth in India.The SLR is commonly used to contain inflationand fuel growth, by increasing ordecreasing it respectively. This counter acts by decreasing or increasing the moneysupply in the system respectively. Indian banks holdings of government securities

(Government securities) are now close to the statutory minimum that banks arerequired to hold to comply with existing regulation. When measured in rupees

such holdings decreased for the first time in a little less than 40 years (since thnationalisation of banks in 1969) in 2005 06.

While the recent credit boom is a key driver of the decline in banks portfolios of

G-Sec, other factors have played an important role recently.

These include:

1. Interest rate increases.

2. Changes in the prudential regulation of banks investments in G -Sec.
http://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/w/index.php?title=G-Sec&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=G-Sec&action=edit&redlink=1http://en.wikipedia.org/wiki/Inflation


21/37

21

Most G-Sec held by banks are long-term fixed-rate bonds, which are sensitive tochanges in interest rates.Increasing interest rates have eroded banks income fromtrading in G-Sec.

Recently a huge demand in G-Sec was seen by almost all the banks when RBreleased around 108000 crore rupees in the financial system. This was by reducinCRR, SLR & Repo rates. This was to increase lending by the banks to thecorporates and resolveliquidity crisis. Providing economy with the much neededfuel of liquidity to maintain the pace of growth rate. However the exercise becam

futile with banks being over cautious of lending in highly shaky market conditionsBanks invested almost 70% of this money to rather safe Govt securities thanlending it to corporates.

The main objectives for maintaining the Statutory Liquidity Ratio are thefollowing:

Statutory Liquidity Ratio is maintained in order to control the expansion oBank Credit.

By changing the level of Statutory Liquidity Ratio, Reserve bank of India canincrease or decrease bank credit expansion.

Statutory Liquidity Ratio in a way ensures the solvency of commercial

banks.

By determining Statutory Liquidity Ratio, Reserve Bank of India, in a waycompels the commercial banks to invest in government securities like governmen bonds.
http://en.wikipedia.org/wiki/Liquidity_crisishttp://en.wikipedia.org/wiki/Liquidity_crisis


22/37

22

Value and formula

The quantum is specified as some percentage of the total demand and timeliabilities ( i.e. the liabilities of the bank which are payable on demand anytimeand those liabilities which are accruing in one months time due to maturity) of a bank.

SLR rate = (liquid assets / (demand + time liabilities)) 100%

This percentage is fixed by the central bank. The maximum and minimum limitfor the SLR are 40% and 25% respectively in India.[1]Following the amendment ofthe Banking regulation Act(1949) in January 2007, the floor rate of 25% for SLRwas removed. Presently, the SLR is 24.5%.

Difference between SLR and CRR

Both CRR and SLR are instruments in the hands of RBI to regulate money supplyin the hands of banks that they can pump in economy

SLR restricts the banks leverage in pumping more money into the economy. On

the other hand, CRR, or cash reserve ratio, is the portion of deposits that the bankshave to maintain with the Central Bank to reduce liquidity in banking system. ThuCRR controls liquidity in banking system while SLR regulates credit growth in thecountry.
http://en.wikipedia.org/wiki/Statutory_liquidity_ratio#cite_note-1http://en.wikipedia.org/wiki/Statutory_liquidity_ratio#cite_note-1http://en.wikipedia.org/wiki/Reserve_Requirementhttp://en.wikipedia.org/wiki/Reserve_Requirementhttp://en.wikipedia.org/wiki/Statutory_liquidity_ratio#cite_note-1


23/37

23

The other difference is that to meet SLR, banks can use cash, gold or approvedsecurities whereas with CRR it has to be only cash. CRR is maintained in cash

form with central bank,

whereas SLR is money deposited in govt. securities. CRR is used to controlinflation.


24/37

24

9. How CRR Help Impact Liquidity

The Reserve Bank of India has various tools to control and maintain liquidity inthe market. Two among them are the CRR and Repo rate.

CRR: Cash Reserve Ratio (CRR) is the ratio of deposits banks must maintain withthe Reserve Bank of India. This implies that if a person deposits Rs 1,000 in hiaccount, the bank can use it to lend others, but it has to deposit a percentage of thaamount with the RBI. Hence, if CRR is 5%, the lender will deposit Rs.50 with theRBI and has Rs.950 left at its disposal.

CRR determines bank interest rates : If a man had deposited Rs.1,000 in hisaccount when the CRR was 5%, the bank will have at its disposal Rs.950 after ideposits Rs.50 as CRR. The bank in turn lends the Rs.950 to a borrower who wileventually repay the bank.

The bank will once again lend this amount (Rs.950) to another borrower aftedepositing 5% of the amount (Rs.47.5) to the RBI. In this manner, the money wilkeep exchanging hands, or it continues to be created and available for subsequen borrowers. This means that Rs.1,000 is helping generate a far higher amount in th


25/37


26/37

26

10. CHANGES IN CASH RESERVES RATIO AND

STATUTORY LIUIDITY RATIO:

Here is a timeline of changes to the key rates in India since as early as 1949:

Cash Reserve Ratio since 1992

Rate Effective date

4.00 09-02-2013

4.25 03-11-2012

4.50 22-09-2012

4.75 10-03-2012

5.50 28-01-2012


27/37

27

6.00 24-04-2010

5.75 27-02-2010

5.50 13-02-2010

5.00 17-01-2009

5.50 08-11-2008

6.00 01-11-2008

6.50 15-10-2008

7.50 11-10-2008

9.00 30-08-2008

8.75 19-07-2008

8.50 05-07-2008

8.25 24-05-2008

8.00 10-05-2008

7.75 26-04-2008

7.50 10-11-2007

7.00 04-08-2007


28/37

28

6.50 28-04-2007

6.25 14-04-2007

6.00 03-03-2007

5.75 17-02-2007

5.50 08-12-2006

5.00 02-10-2004

4.75 18-09-2004

4.50 14-06-2003

4.75 16-11-2002

5.00 01-06-2002

5.50 29-12-2001

5.75 03-11-2001

7.50 19-05-2001

8.00 10-03-2001

8.25 24-02-2001

8.50 12-08-2000

8.25 29-07-2000


29/37

29

8.00 22-04-2000

8.50 08-04-2000

9.00 20-11-1999

9.50 06-11-1999

10.00 08-05-1999

10.50 13-03-1999

11.00 29-08-1998

10.00 11-04-1998

10.25 28-03-1998

10.50 17-01-1998

10.00 06-12-1997

9.50 22-11-1997

9.75 25-10-1997

10.00 18-01-1997

10.50 04-01-1997

11.00 09-11-1996


30/37

30

11.50 26-10-1996

12.00 06-07-1996

13.00 11-05-1996

13.50 27-04-1996

14.00 09-12-1995

14.50 11-11-1995

15.00 06-08-1994

14.75 09-07-1994

14.50 11-06-1994

14.00 15-05-1993

14.50 17-04-1993

15.00 08-10-1992


31/37

31

Statutory Liquidity Ratio

Rate Effective date

3.00 11-08-2012

24.00 18-12-2010

25.00 07-11-2009

24.00 08-11-2008

25.00 25-10-1997

31.50 29-10-1994

33.75 17-09-1994

34.25 20-08-1994

34.75 16-10-1993

37.25 18-09-1993

37.50 21-08-1993

37.75 06-03-1993

38.00 06-02-1993

38.25 09-01-1993


32/37

32

38.50 29-02-1992

38.50 22-09-1990

38.00 02-01-1988

37.50 25-04-1987

37.00 06-07-1985

36.50 08-06-1985

36.00 01-09-1984

35.00 30-10-1981

34.50 25-09-1981

34.00 01-12-1978

33.00 01-07-1974

32.00 08-12-1973

30.00 17-11-1972

29.00 04-08-1972

28.00 28-08-1970

27.00 24-04-1970

26.00 05-02-1970


33/37

33

RBI raises Bank Rate as a Technical Adjustment

The Reserve Bank of India has decided to change the Bank Rate with immediate effect byrealigning it with the Marginal Standing Facility (MSF) rate, which in turn is linked to therepo rate under the Liquidity Adjustment Facility (LAF). Accordingly, the Bank Rate shalper cent with effect from the close of business today. This should be viewed and understootime technical adjustment to align the Bank Rate with the MSF rate rather than a change inmonetary policy stance. Henceforth, whenever there is an adjustment of the MSF rate, the

Bank will consider and align the Bank Rate with the revised MSF rate. All penal interest rshortfall in reserve requirements, which are specifically linked to the Bank Rate, also stan

25.00 16-09-1964

20.00 16-03-1949


34/37

34

Background

Section 49 of the Reserve Bank of India Act, 1934 requires the Reserve Bank to make pubtime to time) the standard rate at which it is prepared to buy or re-discount bills of exchanother commercial paper eligible for purchase under that Act. Since discounting/rediscountthe Reserve Bank has remained in disuse, the Bank Rate has not been active.

Being the discount rate, the Bank Rate should technically be higher than the policy repo raBank Rate has, however, been kept unchanged at 6 per cent since April 2003. This was mathe reason that monetary policy signalling was done through modulations in the reverse re

and the repo rate under the Liquidity Adjustment Facility (LAF) (till May 3, 2011) and therepo rate under the revised operating procedure of monetary policy (from May 3, 2011 onMoreover, under the revised operating procedure, marginal standing facility (MSF), institu100 basis points above the policy repo rate, has been in operation, which more or less servpurpose of the Bank Rate.

While the policy repo rate and the MSF rate have become operational, the Bank Rate cont

remain at 6 per cent. The Bank Rate acts as the penal rate charged on banks for shortfalls imeeting their reserve requirements (cash reserve ratio and statutory liquidity ratio). The Bis also used by several other organisations as a reference rate for indexation purposes.

The Reserve Bank consulted various organisations/stakeholders that rely on Bank Rate as reference rate. Based on the feedback received, it is determined that the Bank Rate shouldstay aligned to the MSF rate.

Accordingly, it has been decided that with effect from the close of business today (Februa2012), the Bank Rate will stand increased by 350 basis points, i.e., from 6.00 per cent per 9.50 per cent per annum.


35/37

35

11. COCLUSION

The CRR 2009 Retirement Survey is a useful survey to assess how households responded the

financial crisis. The weighting scheme should be carefully selected based on the particular

application, but the sample can be weighted to be representative to two distinct populationthe

45-59 year-old labor-force participants (weight4); and the 45-59 year-old labor-forcparticipants

with retirement-asset-to-income ratios between zero and six as prescribed by the quota

(weight2). While the general findings are similar to other surveys about reactions to the

downturn, this survey is unique in the breadth of information collected. It offers insighinto

what determines individuals re sponses, including financial, employment, andpsychological

factors. Further, this survey includes two separate information experiments to see wh


36/37

36

changes their intended responses, and how they change. This survey provides numerouopportunities for future research.


37/37

12. REFERENCE

1. www.google.com

2. www.wikipedia.com

3. Time of India

4. Business Economy

5. Indian Economy (Book)

6. www.moneycontrol.com
http://www.google.com/http://www.wikipedia.com/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.wikipedia.com/http://www.google.com/

Documents

Mcom Part 2_RM Project