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Cash Reserve Ratio: Understanding Monetary Policy (for UPSC CSE)
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This lesson continues the discussion on monetary policy and covers the important concept of Cash Reserve Ratio (CRR). It starts with the definition of CRR, main objective of CRR, how and why it is altered by RBI, reduction of CRR, impact on inflation, impact of increase in CRR, why a ceiling on CRR was imposed adn much more. This lesson will clear all your doubts related to CRR.

Ayussh Sanghi is teaching live on Unacademy Plus

Ayussh Sanghi
Passionate Educator - CSE / Other Govt Exams [Peep into my Unacademy Plus Courses & experience awesome learning.]

U
Unacademy user
sir at 8.19. 3rd point it is increase in CRR and not reduction in CRR that sucks money out of system.! well explained this series sir, thank you.
Shubhi Tanvi
2 years ago
yes ofcourse
Toshi
2 years ago
yes correct..thanks...I got a bit stuck there initially...
2ND LAST SLIDE WHEN REDUCTION IN CRR THERE WILL BE DECREASE IN BANK RATES AND INCREASE IN MONEY FLOW(LIQUIDITY), MONEY CHASES WILL BE MORE AND RESULTS IN INFLATION WOULD BE HIGH
Amit Singh
3 years ago
that is a mistake i think....bcz in that slide he is talking about increases in crr...so that must be a mistake
Moosa Iqbal
2 years ago
It should be "increase in CRR sucks money out of system"...
I have confusion about maintenance of crr with RBI ,it is maintained on daily basis or as u have told and is there any provision to pay fine if banks don't mantain
Ak
Abhishek kumar
10 months ago
it's explained in video itself though just for ur understanding vishal.... Actually CRR is a factor dependent on NDTL of a particular bank....as NDTL is calculated on fortnightly (after 15 day duration) basis and CRR is dependent on NDTL ...so CRR share (part which is fixed by RBI in its monetary policy every 2 month) has also to be maintained as per this NDTL. yes provisions of penalty is there
SS
Hello sir..there is a mistake in your 2nd last slide I think...reduction in CRR will increase the money supply in the system but in the 2nd last slide it is mentioned that it will decrease money supply in the system
Ya I too had the same same issue..!! You are correct Smriti.
Barun Shankar
3 years ago
yes i also think its incorrect.
thanks sir.. very helpful videos.. but in ur 2nd last slide there is mistake reductiion in crr, increase the money supply instead of derease in money supply...
Do foreign banks also have to maintain CRR within RBI and SLR within themselves or they adopt international standards like LCR? Please do reply sir
They maintain it as per the provisions of RBI
  1. MONETARY POLICY Cash Reserve Ratio PART 5 BY AYUSSH SANGHI


  2. ABOUT ME >Passionate about Teaching >Taught at most reputed Civil Services Institutes >CA, Lawyer >Hit "Contribute to Ayussh" Follow me on: https://unacademy.in/user/ AyusshSanghi


  3. Cash Reserve Ration (CRR) Cash Reserve Ratio (CRR) is the amount of funds that the banks are bound to keep with Reserve bank of India as a percentage (proportion) of their Net Demand and Time Liabilities (NDTL) k The objective of CRR is to ensure the liquidity and solvency of the Banks. The CRR is maintained fortnightly average basis


  4. Objective Main objective of CRR is to: ak n the financial system and enough solvency for the Banks.


  5. How does CRR work? * CRR is altered by RBI Reduction of CRR In case of reduction of CRR, excess funds are available with banks for deploying in other businesses because they are required to keep lesser amounts with RBI. This means that the banks would have more money to lend and this leads to reduction of interest rates on Loans provided by the Banks


  6. How CRR Works? Impact on Inflation Reduction in CRR leaves more money in the hands of commercial banks and this leads to increase in the money supply in system. When money supply rises, too much money chases too few goods and this leads to rise in inflation.


  7. How CRR Works? Increase in CRR When RBI increases the CRR, less funds are available with banks as they have to keep larger portions of their cash in hand with RBI. * This infers that banks will now have less money to lend. Reserve Bank also does not pay any interest on the CRR balances Since commercial banks don't earn any interest, the banks are left with no option but to increase the interest rates.


  8. How CRR Works? Increase in CRR If RBI hikes this rate substantially, banks will have to increase the loan interest rates. Example: Home Loans, Car Loans increase. k Thus hike in CRR leads to increase of interest rates on Loans provided by the Banks. Reduction in CRR sucks money out of the system causing decrease in money supply. When money supply decreases, the inflation automatically comes down.


  9. How is the rate of CRR fixed? There is a ceiling on CRR. RBI, earlier, was empowered to fix the rate between 3-20%. But from 2006 the upper and lower limits on CRR were removed. Now RBI is empowered to fix the CRR on its discretion without any ceiling.