Advantages of CRR or, the Cash Reserve Ratio

Advantages of CRR or, the Cash Reserve Ratio

Tags:      Gig Economy     Economy     WTO     WTO Public Stockholding     MSP     Economic Growth     Masala Bond     Environmental Performance Index     Forecast of Economic Growth     Functions of the Finance Commission

The CRR or, the cash reserve ratio helps any scheduled commercial bank develop and maintain its solvency position. It ensures that scheduled commercial banks' liquidity systems are constantly maintained to a high standard. It aims to ensure that the country's economy has an uninterrupted flow of credit as well as cash. The Reserve Bank of India can manage and coordinate the loans that commercial banks extend by implementing a cash reserve ratio. A scheduled commercial bank will be able to provide additional loans, such as personal loans, vehicle loans, home loans, and other forms of credit, to borrowers across the country when the RBI drops the CRR. This will increase the amount of money flowing to the general populace.

The cash reserve ratio functions as an excellent tool for absorbing liquidity when the interest rate in the market is sharply on the decline. The instrument's operation will aid to improve the falling rates. When opposed to depending on other financial instruments like Market Stabilization Scheme (MSS) bonds, implementing the cash reserve ratio is more effective. Generally, MSS bonds take a long time to manage the nation's liquidity system.

Every time there is a rupee excess situation, the cash reserve ratio helps to moderate the financial environment. As was already said, the cash reserve ratio aids in managing overall liquidity by facilitating the flow of money throughout the economy. It is set in accordance with the financial market's money supply. The RBI will immediately increase the CRR to eliminate any extra funds as the supply of money increases. The RBI will raise the CRR, on the other hand, in order to release more money into the market in order to sustainably fulfill demand when there is a shortage of liquidity or when there is a decline in the supply of money.