CRR is an useful instrument to regulate money supply and control inflation
By M Y Khan ( published in Economic Times )
The cash reserve ratio (CRR) emerged in England in 1826 following the establishment of private joint-stock commercial banks. The banks began to entrust their surplus cash with the Bank of England, the issuer of notes circulated in the country and commanding public confidence as the bank of the government.
With the establishment of the US Federal ReserveBank in 1914, cash reserves began to be treated as a financial stability provision. It was accepted that cash reserves with the central banks will work as a great source of strength to commercial banks and that centralised cash reserves will offer a more elastic credit structure.
Cash reserves with central banks perform the following functions: initially, safety to deposits with commercial banks, facilitation of interbank settlement, transaction clearance, fund transfers to needy banks and liquidity to the financial sector.
Central banks have been using CRR exogenously to control the volume of primary deposits and potential to generate secondary deposits in order to regulate the money supply and inflation. Thus, variation of reserve requirement has always impacted money supply whenever it has been used. In the beginning, central banks desired that commercial banks should keep separate cash reserve against time and demand deposits.
For instance, the Federal Reserve Bank specified 3% reserves against the time deposits and 7-13% against demand deposits. The New Zealand Central Bank, on the other hand, kept the ratios at 5% and 20%, respectively. This arrangement in the 19th century was converted into mandatory ratio under the legal authority of central banks that empowered them to prevent injurious growth and to enhance the supply of credit.
Today, in many central banks, monetary management has been undertaken by discount rate, repo/reverse repo rate and open market operations along with CRR. A view has been aired that mandatory reserves requirement, which was revised downward from 4.75% by the RBI to 4.50% on September 17, has been putting banks at a disadvantage compared to other financial institutions that can charge interest on every rupee they lend. Commercial banks also finance several government schemes at lower interest rates and invest 23% of time and demand deposits in government securities to meet the statutory liquidity ratio (SLR) mandate.
The commercial banks lend nearly 40% of their demand and time liabilities to designated priority sectors at relatively low interest rates. Thus, a bulk of their resources have to be used on interest rates lower than the deposit rates. These operations result in losses to commercial banks. This is the reason that commercial banks have shown comparatively inferior performance than they are expected to achieve. So, why do commercial banks a number of times invest a higher amount than required in government securities?
SBI chairman disagrees with RBI, says CRR is waste for economy ( published in Economic Times Today )
MUMBAI: SBI Chairman Pratip Chaudhuri on Tuesday once again expressed his open disagreement with theRBI on CRR saying it is a "waste" for the economy and successive interest rate cuts by central bankBSE -2.54 % have failed to contain inflation.
"Of course, I am an incurable optimist and I had expected a 50 basis points CRR cut. I still hold that CRR is a waste for the economy," he said after RBI Governor D Subbarao unveiled the half-year review of the credit policy which had a 0.25 per cent cut in CRR.
"But anyway it (CRR) has been cut by 25 basis points and governor had his own reasons and his own compulsions to see the inflation down," he said.
This is not the first time the head of the largest bank has had a run-in with the RBI. Chaudhuri had raised the issue of CRR in August too, but was vehemently countered by RBI Deputy Governor K C Chakrabarty. "If the SBI Chairman is not able to do business as per our regulatory environment, he has to find some other place," Chakrabarty had said.
Taking a jibe at RBI's attempts at reining in inflation by effecting 10 interest rate hikes, Chaudhuri said it did yield desired result.
"But I do not think that the 10 rate increases that happened have not helped in lowering the inflation because today's inflation is largely cost push. It is not so much of demand pull," he said. "So to try to address that the rate of interest as an instrument may not be very effective," he said.
The WPI inflation for September rose to 7.81 per cent, from 7.55 per cent in August. At the same time, the central bank also raised the March-end inflation estimate to 7.5 per cent, from 7 per cent projected earlier.
The RBI said that despite recent moderation, global commodity prices remain high. But geopolitical developments could further flare up prices and induce inflationary pressure.
By M Y Khan ( published in Economic Times )
The cash reserve ratio (CRR) emerged in England in 1826 following the establishment of private joint-stock commercial banks. The banks began to entrust their surplus cash with the Bank of England, the issuer of notes circulated in the country and commanding public confidence as the bank of the government.
With the establishment of the US Federal ReserveBank in 1914, cash reserves began to be treated as a financial stability provision. It was accepted that cash reserves with the central banks will work as a great source of strength to commercial banks and that centralised cash reserves will offer a more elastic credit structure.
Cash reserves with central banks perform the following functions: initially, safety to deposits with commercial banks, facilitation of interbank settlement, transaction clearance, fund transfers to needy banks and liquidity to the financial sector.
Central banks have been using CRR exogenously to control the volume of primary deposits and potential to generate secondary deposits in order to regulate the money supply and inflation. Thus, variation of reserve requirement has always impacted money supply whenever it has been used. In the beginning, central banks desired that commercial banks should keep separate cash reserve against time and demand deposits.
For instance, the Federal Reserve Bank specified 3% reserves against the time deposits and 7-13% against demand deposits. The New Zealand Central Bank, on the other hand, kept the ratios at 5% and 20%, respectively. This arrangement in the 19th century was converted into mandatory ratio under the legal authority of central banks that empowered them to prevent injurious growth and to enhance the supply of credit.
Today, in many central banks, monetary management has been undertaken by discount rate, repo/reverse repo rate and open market operations along with CRR. A view has been aired that mandatory reserves requirement, which was revised downward from 4.75% by the RBI to 4.50% on September 17, has been putting banks at a disadvantage compared to other financial institutions that can charge interest on every rupee they lend. Commercial banks also finance several government schemes at lower interest rates and invest 23% of time and demand deposits in government securities to meet the statutory liquidity ratio (SLR) mandate.
The commercial banks lend nearly 40% of their demand and time liabilities to designated priority sectors at relatively low interest rates. Thus, a bulk of their resources have to be used on interest rates lower than the deposit rates. These operations result in losses to commercial banks. This is the reason that commercial banks have shown comparatively inferior performance than they are expected to achieve. So, why do commercial banks a number of times invest a higher amount than required in government securities?
The cash reserve ratio (CRR) emerged in England in 1826 following the establishment of private joint-stock commercial banks. The banks began to entrust their surplus cash with the Bank of England, the issuer of notes circulated in the country and commanding public confidence as the bank of the government.
With the establishment of the US Federal ReserveBank in 1914, cash reserves began to be treated as a financial stability provision. It was accepted that cash reserves with the central banks will work as a great source of strength to commercial banks and that centralised cash reserves will offer a more elastic credit structure.
Cash reserves with central banks perform the following functions: initially, safety to deposits with commercial banks, facilitation of interbank settlement, transaction clearance, fund transfers to needy banks and liquidity to the financial sector.
Central banks have been using CRR exogenously to control the volume of primary deposits and potential to generate secondary deposits in order to regulate the money supply and inflation. Thus, variation of reserve requirement has always impacted money supply whenever it has been used. In the beginning, central banks desired that commercial banks should keep separate cash reserve against time and demand deposits.
For instance, the Federal Reserve Bank specified 3% reserves against the time deposits and 7-13% against demand deposits. The New Zealand Central Bank, on the other hand, kept the ratios at 5% and 20%, respectively. This arrangement in the 19th century was converted into mandatory ratio under the legal authority of central banks that empowered them to prevent injurious growth and to enhance the supply of credit.
Today, in many central banks, monetary management has been undertaken by discount rate, repo/reverse repo rate and open market operations along with CRR. A view has been aired that mandatory reserves requirement, which was revised downward from 4.75% by the RBI to 4.50% on September 17, has been putting banks at a disadvantage compared to other financial institutions that can charge interest on every rupee they lend. Commercial banks also finance several government schemes at lower interest rates and invest 23% of time and demand deposits in government securities to meet the statutory liquidity ratio (SLR) mandate.
The commercial banks lend nearly 40% of their demand and time liabilities to designated priority sectors at relatively low interest rates. Thus, a bulk of their resources have to be used on interest rates lower than the deposit rates. These operations result in losses to commercial banks. This is the reason that commercial banks have shown comparatively inferior performance than they are expected to achieve. So, why do commercial banks a number of times invest a higher amount than required in government securities?
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