CRR & SLR

Introduction

• What Is Money?

• Functions of money

• Effects of the monetary policy

Inflation

• Meaning and types of inflation– Demand-Pull Inflation– Cost-Pull Inflation– Stagflation

• Causes of inflation in India– Causes of inflation in India– Deficit financing– Erratic agricultural growth– Agricultural price policy of the government

Deflation

•Why Deflation occurs?

•Impacts exerted by Deflation

•Causes of deflation in India– Decrease in the money supply– Increase in the supply of goods– Fall in the demand for goods– Escalation in the demand for money

• Monetary measures• Fiscal measures• Control over investments

Measures to check inflation

Effects on money supply

• CRR is used as a tool in monetary policy, influencing the

country’s economy, borrowing and interest rates

• CRR works like brakes on the economy’s money supply

• CRR requirements affect the potential of the banking system to

create higher or lower money supply

Cash Reserve Ratio

• For e.g. say…the CRR is pegged by RBI at 10%. if a bank receives Rs. 100 as deposit, then they can lend Rs. 90 as a loan and will have to keep the balance Rs. 10 in customer’s deposit account.

• Now, the borrower who has received Rs. 90 as a loan will deposit the same in his bank.

• The borrower’s bank will now lend out Rs. 81 (Rs. 90 X 90%) and keep Rs. 9 in his deposit account.

• As this process continues, the banking system can expand the initial deposit of Rs.100 into a maximum of Rs. 1000 (Rs. 100 + Rs. 90 + Rs. 81….=Rs. 1000)

And similarly if,

• For e.g. say…the CRR is pegged by RBI at 20%. if a bank receives Rs. 100 as

deposit, then they can lend Rs. 80 as a loan and will have to keep the

balance Rs. 20 in customer’s deposit account

• Now, the borrower who has received Rs. 80 as a loan will deposit the same

in his bank

• The borrower’s bank will now lend out Rs. 64 (Rs. 80 X 80%) and keep Rs.

16 in his deposit account

• As this process continues, the banking system can expand the initial

deposit of Rs.100 into a maximum of Rs. 500 (Rs. 100 + Rs. 80 + Rs.

64….=Rs. 500)

So,

• The higher the cash reserve (CRR) required, the lower the money available for

lending.

• This reduces credit expansion by controlling the amount of money that goes out

by way of loans.

• This directly affects money creation process and in turn affects the economic

activity

• Hence central banks in the world increase the requirement of cash reserves

whenever they feel the need to control money supply

So we can conclude it as,

• CRR is increased to bring down inflation which happens due to

excessive spending power.

• Conversely, if the government wants to stimulate higher economic

activity and encourage higher spending to achieve economic

growth, they will lower CRR.

• Thus, banks indirectly enjoy the power to create more money.

• Maintenance of CRR

• Incremental CRR

• Maintenance Of Cash Balance

IMPACTS OF HIKE IN CRR

How Does A CRR Hike Help In Lowering Inflation?

• Higher prices of food articles, more liquidity in the system and the lower base effect of last year.

• Hike in CRR rate ,Excess liquidity is sucked out of the markets.

• Banks have lesser cash to deploy as loans.

• As banks gets less money for giving loans, in order to maintain profit margin they increase lending rates.

• As loan rates go up, consumers tend to borrow less and eventually spend less.

• Demand for goods and services come down

Impact on Interest rates

• Impact of crises on exchange rate

• Impact on liquidity

• Impact on credit off-take

• Impact on Banks and Individuals

Effect of CRR Hike on Rate-sensitive Stocks

• Real estate

• Auto

• Debt markets

• Effect on Loans

• Effect on Companies

• Fixed Deposits

• So what should you do?

From a stock market perspective

• So what should you do?

From a debt market perspective

• Does RBI impose on penalty on banks for defaulting on CRR deposits?

• Does CRR apply to all scheduled banks?

Statutory Liquidity Ratio

• Meaning

• Objective

• Maintenance of SLR

Does a change in SLR impact the interest rates?

Comparison with Asian countries

• The SLR As A Monetary Policy Instrument In

Bangladesh

• Philippine Central Bank Cut Reserve Requirement

Case Study

• The case provides insights into the inflationary

situation witnessed in 2006-07 in India.

• It examines the reasons behind the phenomenon

of inflation and describes the various measures

taken by the Indian government and the nation's

central bank to control it.

• It also discusses some of the criticisms against the steps taken by the Indian government.

• Understand the concept of inflation and its causes.

• Critically analyze the various initiatives taken by the

Indian government and the RBI to address inflation.

• Understand the concept of inflation and its causes.

• Critically analyze the various initiatives taken by the Indian

government and the RBI to address inflation.

• Analyze the significance of Government and Central

Bank in controlling inflation and the possible effect of

their initiatives on the economy.

Thank you