Goals and Calculation of the CRR

Goals and Calculation of the CRR

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The primary goal of the CRR or, the cash reserve ratio is to make sure that commercial banks have enough cash on hand to meet their depositors' demands for cash withdrawals and other obligations. By requiring banks to keep a certain amount of reserves, which can be used to meet cash demand if necessary, the CRR contributes to the stability of the banking system.

The following is a summary of the goals of CRR

• It ensures that the RBI safeguards a portion of the bank's deposits to maintain solvency.

• It regulates the economy's cash flow. The amount of money that will enter the economy is determined by the RBI's policy decisions.

• CRR aids in limiting inflation. For instance, the RBI raises the CRR when inflation is high to make it harder for banks to approve loans. Market liquidity decreases as a result, which contributes to lower inflation.

• Market liquidity crunches are helped by CRR. The RBI lowers the CRR during these times so that banks can lend more money to people to bring the economy into balance.

What Happens When CRR Goes Up?

It becomes more expensive for commercial banks to hold deposits with the central bank when the RBI raises the cash reserve ratio (CRR). As a result, banks don't have as much money to lend or invest, which can affect the economy's credit supply. As it becomes more difficult for individuals and businesses to obtain credit, this may have a contractionary effect on the economy. Because there is less money in circulation in the economy, an increase in the CRR can also result in a decrease in the money supply. However, as it reduces the amount of money available for lending and investment, an increase in the CRR can also assist in reducing inflationary pressures in the economy.

Cash Reserve Ratio Formula and Calculation A bank's net demand and time liabilities (NDTL) determine the CRR calculation. Simply put, NDTL can be defined as the sum of a bank's public and other deposits minus the deposits of other banks. Dividends, demand drafts, cash certificates, fixed & gold deposits are all liabilities that make up NDTL. The recipe for registering CRR is: The RBI determines the Cash Reserve Ratio (CRR), which is equal to the Reserve Requirement divided by Bank Deposits. A percentage of the NDTL is used to calculate the Cash Reserve Requirement. Banks consider the NDTL to include the total balance of all fixed deposits, savings accounts, and current accounts. Let's say, for instance, that a bank's NDTL is Rs and the CRR is set at 4%. 100 crore. The bank would need to keep cash reserves of: Rs. [( Rs. 4 / 100) x 100 crore)] 4 crore. As a result, the bank would need to hold Rs. 4 million dollars of its deposits with the RBI. The bank would not be able to borrow or invest this amount.