Variable Reserve Ratio


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Variable Reserve Ratio

 

Every commercial bank in the country is under a legal obligation to keep a certain proportion of their deposits in the form of cash with the central bank of the country. The ratio of these cash deposits to the total deposits of a commercial bank is called the cash reserve ratio. If the CRR is 10 % and if the total deposits of a bank are rupees Rs.1000 crore, it has to keep Rs.100 crore with the central bank in the form of cash. In India the range within which the CRR can be changed is fixed by Parliament under the RBI act 1935 as amended from time to time. The range is between 5% to 20%. RBI is authorised to change the rate within that margin depending upon the requirements of the time.

 

In Feb 2001, the CRR was 8.5%. Since then RBI adopted the policy of lowering it because of the recessionary tendencies prevailing in the country. The CRR was lowered from 8.5% progressively to 4.5 % by June 2003. It was almost on the same level till the end of 2004 since when the RBI started raising it. It was raised to 8.25 % upto july 2008. On 5th july 2008 it was increased to 8.5%, on 19th july to 8.75% and on 29th of July to 9%.

 

When the banks keep more cash with the central bank they are left with less cash for advancing loans. The supply of credit money declines.


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