Controlling the supply of money in the economy and cost of credit are two primary functions for the Reserve bank of India. The inflation and growth in the economy are primarily effected by these two factors. To control the inflation and growth, RBI uses various mechanisms or tools. CRR and SLR are amongst them.
Cash Reserve Ratio (CRR):
1. Cash Reserve Ratio is the amount of funds that banks have to deposit in the current account of the Reserve Bank of India (RBI) at all times.
2. If the RBI decides to increase the CRR, the amount available with the banks for lending loans/disbursal comes down. If RBI decreases the CRR, then the banks will have more money to lend/invest. So, more money can be released into the economy which may offshoot growth of the economy.
3. Current CRR Rate: - 4%
4. You ----->>Deposit (500) ------>> Bank (480 balance) ----->>CRR (20) ----->> RBI
5. CRR remains in current account of RBI and banks don’t earn any interest on it.
Statutory Liquid Ratio (SLR):
1. In SLR banks have to invest certain percentage of their deposits in specified financial securities like Central Government or State Government securities like bonds, Gold. This percentage is known as SLR.
2. Current SLR Rate: - 19.5%
3. You -->Deposit (1000) --->Bank (805 balance) -->SLR (195) --> RBI--->> Interest (10) -->>Bank
4. Banks can earn interest on these investments as against CRR where it earns zero.