Monetary Policy

Monetary Policy is a Policy made by the central bank(RBI) to control money supply in the economy and thereby fight both inflation and deflation. It helps maintain price stability and achieve high economic growth. To Combat Inflation RBI reduces Money

Supply (Tight/Dear Money Policy). To Combat Deflation RBI increases Money Supply (Easy/Cheap Money Policy).

RBI implements monetary policy using certain tools. These are Quantitative Tools and Qualitative Tools. Quantitative Tools are Reserve Ratios(CRR,SLR) , OMO(Open Market Operations) and Rates(Repo , Reverse Repo , Bank Rate , MSF).

Cash Reserve Ratio

Cash Reserve Ratio is a certain percentage of bank deposits (Net Time and Demand Liabilities) which banks are required to keep with RBI in the form  of reserves or balances .

Higher the CRR with the RBI lower will be the liquidity in the system and viceversa.

It’s a dead Money as Banks don’t receive any Interest from RBI for reserves kept.

RBI can charge Penalty(3% above Bank Rate) for not keeping the reserves. CRR is defined under Sec 42(1) of RBI Act , 1934.

Its Minimum and Maximum value is the discretion of RBI. It is maintained on Fortnightly Average Basis. At Present The CRR is 4%. By Increasing CRR the Money Supply can be Reduced in Market thereby Controlling Inflation(Dear Money Policy) and by Decreasing it Money Supply can be Increased thereby promoting

Growth(Cheap Money Policy)