CRR and SLR are tools used by the central bank to create an upper limit on deposits created by central banks and control the amount of money supply in the market . It also provides protection to deposit holders since the money is held in reserve with the central bank. Say no to plagiarism. Get a tailor-made essay on “Why violent video games should not be banned”?Get the original essayThe role of CRR CRR is in part a prudential requirement for banks to maintain a minimum amount of cash reserves to meet their payment obligations in a fraction of a second. reserve system. The Reserve Bank of India (RBI) Act implicitly mandated that the CRR be responsible for a minimum of 3 per cent of the net demand and term liabilities of any bank. This restriction was removed by an amendment in 2006. Even though the RBI is now free to prescribe this rate, any CRR above 3% can still be considered as a monetary tool intended to contain the expansion of the money supply by influencing the monetary multiplier. But the way in which the CRR has been operated historically has allowed it to play a much broader role. During the 1990s, when there was an inflow of foreign funds through non-resident Indian (NRI) deposits, differential CRR was prescribed on these deposits to restrict their inflows. This role – the CRR being used as an instrument to regulate the flow of NRI deposits – was relegated to secondary importance once the relative attractiveness of these deposits compared to rupee deposits was removed. Now that the interest rates on NRI deposits have been freed, the above role of CRR may well be revived. In the more recent period after 2004, when there was a massive inflow of foreign capital in various forms of debt and non-debt flows, and the RBI ended up accumulating large foreign exchange reserves, the CRR became an optional instrument to sterilize released rupee resources. of these purchases in dollars. This was notably made possible by not paying any interest on CRR balances maintained by banks with the RBI. Other sterilization options through open market operations and repo operations through the Liquidity Adjustment Window (LAF) are expensive for the central bank, just as the market stabilization plan costs the government fiscally in terms of interest payments. The official view on the CRR has changed. During the period of financial repression preceding the 1990s, the CRR was the preferred monetary policy tool. But the Narasimham Committee of 1991 recommended a gradual reduction in CRR and increased reliance on indirect market-based instruments. This was widely accepted and the CRR was reduced by more than 15 percent to 4.5 percent in 2003. But since 2004, the use of the CRR as an instrument of sterilization and also as a monetary tool has gained ground again . At the same time, the ratio now stands at 4.5 percent, the previous all-time low. In these circumstances, the official philosophy of the CRR in the current situation is not known. Since the CRR acts as a tax that increases their transaction costs, banks in general would like its role to return to a minimum prudential requirement of no more than 3 percent. And as quantitative easing has become a fad among central banks across the world, the RBI may well choose to gradually reduce the CRR to around 3% during the current easing phase, without losing sight of control monetary policy in the face of persistent inflation. stubbornly high at around 8 percent. Keep..