Explain Cash Reserve Ratio and Statutory Liquidity Ratio.

1. Cash Reserve Ratio (CRR)

Meaning — Cash Reserve Ratio (CRR) is the specified percentage of total cash deposits that commercial banks are required to keep with the central bank in the form of cash reserves.

How CRR controls credit:

• Increase in CRR — When the central bank raises the CRR, commercial banks must keep a larger portion of their deposits with the central bank as cash reserves. This reduces the amount of money available to grant credit, thereby contracting the volume of credit in the economy. Used to control inflation.

• Decrease in CRR — When the CRR is lowered, commercial banks have to keep a smaller portion as reserves and have more money available to lend. This expands credit and boosts economic activity.

2. Statutory Liquidity Ratio (SLR)

Meaning — Statutory Liquidity Ratio (SLR) is the specified percentage of demand and time liabilities of commercial banks that they must maintain in liquid form, consisting of cash and government securities (held with themselves, not with the central bank).

How SLR controls credit:

• Increase in SLR — When the central bank raises the SLR, commercial banks have to keep a larger portion of their liabilities in liquid assets, reducing the funds available for lending and thereby contracting credit.

• Decrease in SLR — When the SLR is lowered, banks have more funds available for lending, expanding credit in the economy.

Difference — The main difference is that CRR is kept as cash with the central bank, while SLR is kept by the commercial bank itself in cash and government securities. Both are quantitative tools used by the central bank to regulate the overall volume of credit.