In order to maintain financial stability, central banks and banking regulators require financial institutions to hold certain levels of liquid assets. These are known as liquidity requirements and are implemented in the form of cash reserve ratios (CRR) and statutory liquidity ratios (SLR). This article will explore the difference between CRR and SLR.
What is CRR?
CRR or Cash Reserve Ratio is the percentage of cash that banks are required to keep with the RBI. For example, if the CRR is 5%, banks will have to maintain Rs. 100 with RBI for every Rs. 2000 that they have as deposits. CRR is used by RBI as a tool to control liquidity in the banking system as well as inflation. An increase in CRR rate means that banks have less money to lend which leads to a reduction in the money supply in the economy and this slows down economic growth. RBI usually increases CRR when it wants to reign in inflation and decreases CRR when it wants to promote economic growth. CRR is also used as a tool by RBI to send signals to the markets about its monetary policy stance. Currently, CRR is 3%.
What is SLR?
SLR stands for Statutory Liquidity Ratio. It is the percentage of liquid assets that a financial institution must maintain as cash or cash equivalents. SLR is determined by the Reserve Bank of India (RBI) and is currently set at 21.5%. This means that for every Rs.100 in deposits that a bank has, it must maintain Rs.21.5 as cash or cash equivalents. SLR is important because it ensures that banks have enough liquidity to meet their obligations even in times of stress. The RBI uses SLR to control the money supply in the economy and to influence the interest rates charged by banks. SLR also affects the profitability of banks because they are required to set aside a certain percentage of their deposits as cash or cash equivalents.
Difference between CRR and SLR
CRR and SLR are two terms that are often used in the context of banking and monetary policy. CRR stands for Cash Reserve Ratio, and it refers to the percentage of a bank’s deposits that must be kept in cash. SLR, on the other hand, stands for Statutory Liquidity Ratio, and it refers to the percentage of a bank’s deposits that must be invested in government securities.
Both CRR and SLR are important tools for managing the money supply, but they differ in a few key ways. CRR is set by the central bank, while SLR is set by the government. CRR is typically lower than SLR, which means that banks have more flexibility in how they use their deposits. Finally, CRR can be changed relatively quickly if needed, while changes to SLR tend to take longer to implement.
The CRR Cash Reserve Ratio and the SLR Statutory Liquidity Ratio are two important ratios that banks must adhere to. However, there is a lot of confusion about the difference between these two ratios. In this blog post, we have tried to clear up some of that confusion. We hope you have found this information helpful.