After the recent hullabaloo about the RBI CRR hike by 50 basis points to curb inflation the first thing which comes to mind is what is CRR. Cash Reserve Ratio is the percentage of total money that Banks have to retain with themselves from the total deposits.
Lets take a simple example to take the inside view of CRR
Suppose a depositor has 20 bn $ as bank deposits. Lets assume bank invests the money and that same money again gets deposited in the bank. So essentially bank has now 40 bn $ assuming CRR as nil. If this money travel the same route then the money will keep multiplying infinitely.
Lets take a simple example to take the inside view of CRR
Suppose a depositor has 20 bn $ as bank deposits. Lets assume bank invests the money and that same money again gets deposited in the bank. So essentially bank has now 40 bn $ assuming CRR as nil. If this money travel the same route then the money will keep multiplying infinitely.
Let the CRR is x% (x<1).>
In the actual scnerio this hike of 50 basis points from the current 5.5% to 6% will drain about 27,000 crore (5.4 bn $) from the market. In the next post it will be effects of the CRR hike on the interests rate, bond market and share market.
Keep smiling….
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