Question
Download Solution PDFWhat interest does the Reserve Bank of India (RBI) pay to banks on the Cash Reserve Ratio (CRR) balances?
Answer (Detailed Solution Below)
Detailed Solution
Download Solution PDFThe correct answer is No interest is paid.
In News
- RBI mandates banks to keep a portion of their funds as Cash Reserve Ratio (CRR) but does not pay any interest on these balances.
- This reduces the amount of money banks can lend, impacting overall liquidity in the economy.
Key Points
- CRR is the percentage of total deposits banks must keep with RBI in cash.
- RBI does not pay any interest on CRR balances held by banks.
- Higher CRR reduces the funds available for banks to lend, causing interest rates to rise.
- Statutory Liquidity Ratio (SLR) differs as banks earn interest on SLR investments.
- CRR and SLR help RBI manage liquidity and maintain bank solvency.
Additional Information
- Cash Reserve Ratio (CRR)
- Mandatory reserve a bank holds as cash with RBI, expressed as a percentage of deposits.
- Purpose is to ensure liquidity and control money supply.
- Statutory Liquidity Ratio (SLR)
- Banks invest a specified percentage of deposits in government-approved securities.
- Banks earn interest on SLR investments.
- Impact of CRR Increase
- Reduces lending capacity of banks.
- May lead to higher lending rates to customers.
- Bank Solvency
- CRR and SLR help ensure banks can meet their short-term and long-term financial obligations.
Last updated on Jul 10, 2025
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