CRR cut: What does it mean for the aam admi?

A chum, a cinematographer by profession, called me when I was bogged down with the Reserve Bank of India's mid quarter (July-September) policy document. I had to sign off the lead copy for the monetary policy. "Will call you back, a bit busy. RBI has just cut CRR ," I sputtered over my cell phone.

And he exclaimed, perhaps in disgust, "You and your RBI. How does it matter to the common man on the street!" I was not so unjust to take umbrage at my beloved pal's barb. He was right from his angle. Even though the dissemination of business news may be plenty but the elucidation of business jargons is something that can only keep the common man abreast with such news.

What is CRR or cash reserve ratio?

It is the portion of deposits that banks mandatorily keep with the Reserve Bank of India. This generally does not earn any interest for banks. Bankers call it 'idle' money.  

How does a CRR cut matter for YOU?

If you are a borrower in any form (home, auto, education or running a small business), you have reasons to cheer. A cut in CRR will end up giving more money in hands of banks, which will have more space to lend. On the other hand, a decrease in CRR helps improve funds availability for banks. It always leaves a room for interest rate cut. In most cases, the rate cut happens in retail loans.

For example, India's largest lender - the State Bank of India will have around Rs 2,500 crore funds in hand due to 0.25% cut in CRR. Currently CRR is at 4.50%. This money was lying idle with RBI and SBI was not getting any interest. Now, the bank will use the money in expanding credit. If they lend the money at 8% per annum, they will earn an interest of Rs 200 crore. This additional gain may prompt the lender to cut lending rates further.

Simple economic: demand and supply

In view of future demand, RBI wanted to ensure liquidity into the system. Hence, it cut CRR. In between October and March (the busy season), banks need more money to expand their loan books. Moreover, on account of advance tax payment, lenders too require money by the end of September. All these imminent events may lead to a shortage of liquidity in the system. That in turn, will lead to higher borrowing cost for banks. On the contrary, availability of funds will reduce the demand and thereby the cost of borrowings as well, the benefit of which banks can pass on to their customers.  

Saikat Das

saikat.das@network18online.com