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Meaning of Cash Reserve Ratio and Statutory Liquidity Ratio

CRR-Cash reserve Ratio is the amount of Cash(liquid cash like gold)

that the banks have to keep with RBI. This Ratio is basically to secure solvency of the bank and to drain out the excessive money from the banks.
SLR- Statutory Liquidity Ratio is determined and maintained by the

Reserve Bank of India in order to control the expansion of bank credit.

SLR in India of last five year: Year 2008: 24.00% Year 2009: 25.00% Year 2010: 24.00% Year 2011: 24.00% Year 2012: currently SLR is 23.00% CRR in India of last fiveYear: Year 2008: 7.75% 5.5 Year 2009: 5.00% Year 2010: 5.50% - 6.00 Year 2011: 6.00% Year 2012:currently CRR is 4.75%

What happens if RBI increases CRR?

The money availability at banks will be decreased. Interest rates will be increased. Availability of money can be difficult Depositor can get benefit out of the situation as rate of interest is increased.

Why does RBI use Cash Reserve Ratio (CRR)?

For the stability of Economy

To curb Inflation

Objectives of SLR:
Statutory Liquidity Ratio is maintained in order to control the expansion of Bank Credit. By changing the level of Statutory Liquidity Ratio, Reserve bank of India can increase or decrease bank credit expansion. Statutory Liquidity Ratio in a way ensures the solvency of commercial banks. By determining Statutory Liquidity Ratio, Reserve Bank of India, in a way, compels the commercial banks to invest in government securities like government bonds.

What happens if SLR is decreased?

Earlier SLR was 24%, but on last day of July, RBI changed it to 23%. That means, if earlier SBI had total Rs.100 Deposited in all its 11,000+ branches, then SBI would have to park Rs.24 in G-sec but with new RBI rule, SBI will have to park only Rs.23. Meaning SBI can take away Rs.1 from its G-sec investment and use it for giving as loan to regular customers. So, SBI will sell G-sec worth Rs.1 from its suitcase and use that 1 Rupee for lending as House, Car, Business loans to the customers. SBI has one more rupee to lend to the customers, it'll reduce the interest rate (to seduce more customers). Thus Interest Rates go down when SLR is decreased. In real life, 1% decrease in SLR, means SBI alone will have additional Rs.10,000 crores for lending And all the banks (SBI, ICICI, Bank of Baroda etc combined), will have more than 68,000 crores for lending. Now the reverse: If SLR is increased, then banks have less money to lend = they'll charge more interest rates on loans to keep the profit margin same.