Static Quiz 13 May 2023 (Economy)

Cash Reserve Ratio (CRR)
It is the percentage of total deposits (NDTL) of banks that they are required to keep with RBI at any point in time.
• Cash Deposit or CRR is either stored in the bank’s vault or is sent to the RBI.
• Usually, banks do not receive any interest on CRR deposited with RBI.
• Example: Consider a bank that has total deposits of 100 Crore and CRR is 4%. Then it is liable to keep 4 Cr under CRR requirements.
Purpose of CRR:
• Protect the interest of the depositors by keeping a certain amount safe with the RBI.
• Check on inflation:
o In times of High inflation: During inflation (excess money supply) RBI increases CRR. This means that banks have to keep more money under CRR requirements, which means they have less money to lend out. This leads to decrease in money supply
o In times of slow growth: There are times when in an economy money supply is less. This leads to slower growth. In such cases, RBI pumps money into the system. It decreases CRR. This means banks can now lend more resulting in more money in the system.

Why is SLR fixed?
The purpose for maintaining the Statutory Liquidity Ratio (SLR) are as follows,

• To prevent the commercial banks from over-liquidating.
• To control the inflation i.e., by increasing the SLR percentage, the inflation in the country can be brought under control.
• Similarly, during the recession, the SLR percentage can be decreased in order to increase the bank credit.
• To ensure the solvency of commercial banks.
• Since the banks mostly prefer to invest in government securities, the necessity to maintain SLR has created opportunities for the government to sell their debt instruments and securities.

How can a Tight Liquidity Condition Impact Consumers?
 A tight liquidity condition could lead to a rise in the government securities yields and subsequently lead to a rise in interest rates for consumers too.
 RBI may increase Repo Rate, which can lead to a higher cost of funds.
 Banks will increase their repo-linked lending rates and the marginal cost of funds-based lending rate (MCLR), to which all loans are linked to. This rise will result in higher interest rates for consumers.
o The MCLR is the minimum interest rate that a bank can lend at.

Marginal standing facility (MSF) is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely. With the increase of MSF Rate, cost of borrowing increases for banks resulting in reduced available resources to lend.

Bank rate
• In simplest of terms, the rate at which commercial banks can borrow from the RBI without providing any security.
• Lending under bank rate is done for a long period of time

Credit Rationing:
Under credit rationing, RBI fixes a ceiling (maximum limit) on loans and advances of various categories, which the commercial banks cannot exceed. This controls the amount of credit for certain sectors and ensures that all sectors get adequate credit.