Thursday, January 28, 2010

Why RBI hikes and cuts CRR

What CRR is
Cash Reserve Ratio: "It is certain fixed percentage of time and demand liablities of banks that RBI keeps with itself."
Currently it is 5%, when we were grappling with the recession it was hiked by 50 basis point and reached at 5.5% the reason behind was that if CRR is hiked that commercial banks will be having short of supply that can lend to general public bacause banks have to keep reserve more with RBI, generally during slowdown, flow of money tightens , so during recession RBI hikes the CRR but when the recession gets over the RBI again starts to take the reverse steps and cuts the CRR, and we have seen that RBI cut the CRR by 50 basis points and again it is 5%. the reason being that as recession impacts get slow , liquidity starts to flow, and again banks starts to lend the money.
(the monetory measures are taken by RBI, while fiscal measures are taken by government.)