The variable cash reserve ratio is one of the techniques/tools of the credit control policy of the central bank of a country. The USA introduced the variable reserve ratio in 1935 for the first time. Variable reserve ratio are of two types-
- Cash reserve ratio
- Statutory liquidity ratio
Types of variable cash reserve ratio
1. Cash reserve ratio (CRR):
The reserve requirement (or cash reserve ratio) is a central bank regulation that sets the minimum amount of reserves that must be held by a commercial bank. Cash reserve ratio refers to the proportion of net time and demand liabilities (NTDL) of commercial banks maintained in cash form with the Reserve bank of India. The Reserve bank of India determines the cash reserve ratio annually depending on the economic situation of the country. At present (June, 2021) the CRR rate is 4 percent.
2. Statutory reserve ratio (SLR):
Statutory reserve ratio is the proportion of net time and demand liabilities (NTDL) of commercial banks maintained in other than cash with the Reserve Bank of India. Here, other than cash form means investment in gold, silver, precious metal, government securities etc. The Reserve bank determines the statutory reserve ratio annually depending on the economic situation. At present (June, 20121) the SLR is 18 percent.
Objectives of variable reserve ratio
- It control money flow in the economy.
- To control inflation of the economy.
- To regulate money supply of commercial banks.
Effect of variable reserve ratio
- The RBI increases the CRR and SLR rate to reduce the supply of money in the economy. When there is an increase in such rates, the commercial banks are required to keep a large proportion of their NTDL with the Reserve Bank of India. Thus, the commercial banks left less money with them for retail lending or investment purposes. Hence, the supply of money in the economy reduces.
- Similarly, the RBI decreases the CRR and SLR rate to increase the supply of money in the economy. When there is an decrease in such rates, the commercial banks are required to keep a small proportion of their NTDL with the Reserve Bank of India. Thus, the commercial banks left large amounts of money with them for retail lending or investment purposes. Hence, there is an increase in money supply in the economy.