CRR and SLR are tools used by the central bank to create an upper limit on the deposit created by the central banks and control the quantity of money supply in the market. It also provides protection to deposit holders as the money is held in reserve at the central bank. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay The role of CRR The CRR is in part a prudential requirement for banks to maintain a minimum amount of liquidity reserves to meet their payment obligations in a fractional reserve system. The Reserve Bank of India (RBI) law implicitly prescribed the CRR originally at a minimum of 3% of the net demand and time liabilities of any bank. This restriction was removed by an amendment in 2006. Although the RBI is now free to prescribe this rate, any CRR above 3% can still be seen as a monetary tool to contain money supply expansion by influencing the money multiplier . But the way the CRR has historically been managed has meant it has a much larger role. During the 1990s, when there was an inflow of foreign funds through Non-Resident Indian (NRI) deposits, a differential CRR was prescribed on such deposits to limit the inflows. This role (the CRR being used as a tool to regulate flows of NRI deposits) was relegated to the background once the relative attraction of such deposits over rupee deposits was removed. Now that interest rates on NRI deposits have been released, the role of CRR mentioned above may be taken up again. In the more recent period, post-2004, when there was a huge inflow of foreign capital through various forms of debt and non-debt flows, and the RBI ended up accumulating large foreign exchange reserves, the CRR became an optional tool to sterilize the Rupee resources released. from such dollar purchases. This was made possible particularly by the non-payment of any interest on the CRR balances maintained by banks with the RBI. The other sterilization options through open market operations and repo operations through the liquidity adjustment window (LAF) cost the central bank, just as the market stabilization scheme costs the government fiscally in terms of interest payments. The official view on the CRR has changed. During the pre-1990s period of financial repression, the CRR was the preferred monetary policy tool. But the 1991 Narasimham Committee recommended a gradual reduction in CRR and greater use of indirect market-based instruments. This was widely accepted and the CRR was reduced from over 15% to 4.5% by 2003. But since 2004, the use of the CRR as a sterilization tool and also as a monetary tool has gained ground again. At the same time, the ratio is now at 4.5%, the previous all-time low. Under these circumstances, the official philosophy on CRR at the current juncture is not known. Since the CRR acts as a tax that increases transaction costs, banks would generally like to see its role brought back to a minimum prudential requirement of no more than 3%. And since quantitative easing has become a central bank craze across the world, the RBI may choose to gradually lower the CRR to around 3% during the current easing phase, without losing sight of monetary control in the face to remaining inflation. stubbornly high around 8%. Please note: this is just an example. Get a personalized document from us now..