CRR- Cash Reserve Ratio
It is the amount of fund that Bank has to keep with the RBI in form of Cash. Current Rate of CRR is 4%. and Bank can't use that portion of fund Commercially and neither RBI give any kind of Interest to Bank on this fund.
SLR- Statutory liquidity ratio
It is the amount of Fund that bank has to keep with itself in form of Cash, Gold or other approved securities. Current rate of SLR is 19.5%
Q1. How bank maintain CRR and SLR ?
Ans. The main function of Bank is to accept deposits from depositors and advance loans to Borrowers.
Let say Depositor deposit 150cr in Bank. So now bank has Balance of 150cr .
Now next day depositor withdrawal 50Cr from their bank account. So now Bank has Balance of Rs100 cr. ( 150-50 = 100)
Now that balance amount known as - Net Demand Time Liability.
Net Demand Time Liability= Deposit Amount - Withdrwal Amount
Now the 4% NDTL as CRR and 19.5% of this NDTL as SLR is kept to be reserve by Banks with RBi and itself respectively.
Q2. What is Inflation? How RBI control inflation by Using CRR and SLR ?
Ans. Inflation is the Situation when Demand is greater than supply or we can say that when people have more money to spend and they are willing to pay high price of goods and services . Now there is two method to combat with inflation.
1. Either bank increase the Supply of goods and make Demand = Supply. But the supply of goods and services are not in hand of RBI
2. Bank control or minimize the supply of money in market.
Now question arise how RBI combat with inflation? Look following example
Let say currently in market there is 0% CRR and 0% SLR. Now depositor deposits 100cr in bank at rate of 5%. While there is no CRR and SLR hence bank advance all money as loan to borrower at interest rate of 10%. Now borrower get 100cr in their hands and Bank get interest which is 10% of 100cr = Rs10lakhs. Out of which bank give to depositors as 5% interest on 100cr = 5Lakhs.
Profit of bank is = 5 lakh (10-5 =5).
Now borrower has 100cr so they will create demand and if demand become greater than supply then problem of Inflation arises. Now to cope with inflation RBI increase CRR and SLR upto 50%. Due to this out of 100cr bank has to keep reserve 50% of 100cr with RBI and itself. NOw bank has only 50cr to advance loans . Now bank give 5% interest rate to depositor which is 5 lakhs. Now bank also increase its interest rate on Loans to maintain its profit. Lets say bank increase its interest rate on loan upto 20%. Now most of borrowers can't afford loans at such high interest rate and now bank has only 50 crore to advance loans. Due to this supply of money decrease in economy. Less supply of money means people have less money to spend. if less money to spend then demand of goods and services decreases and become equal to supply of goods and services.when demand = supply then problem of Inflation solved.
Q. What is Deflation ? How RBI combat with Deflation?
Ans. Deflation is the situation when Supply of goods and services is greater than demand of goods and services. It means people do not have money to buy the goods and service so they are not capable of creating demand. Now RBI decrease the CRR and SLR due to this bank has large amount to advance loans. When bank has large amount to lend loans then borrower get more money as a loan. when borrower get more money then they will create demand of goods and services. Due to this demand of goods and services is become equal to supply of goods and services . Hence it solve the problem of deflation .
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