The Reserve Bank of India (RBI) uses instruments like the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) to regulate the availability, cost and use of money and credit as a part of its Monetary Policy.
1. Cash Reserve Ratio (CRR):
The CRR or the Cash Reserve Ratio is percentage or share of the net demand and time liabilities (deposits) that commercial banks must maintain as cash reserves with the Reserve Bank of India.
2. Statutory Liquidity Ratio (SLR):
Statutory Liquidity Ratio or the SLR is the percentage or share of net demand and time liabilities (deposits) that commercial banks must maintain (with themselves) in safe and liquid assets, such as, government securities, cash and gold.
The CRR and the SLR is used by the Reserve Bank of India to ensure liquidity in the banking system and influence the availability of resources in the banking system for lending to the private sector.
An increase in the Cash Reverve and Statutory Liquidity Ratio leaves less resources available with the commercial banks to lend to the private sector and forms one of the many tools used by the RBI to control Inflation.
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