What are the differences between Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)?

Recently, the Reserve Bank of India announced its monetary policy. It has kept all the key policy rates unchanged but decreased the Statutory Liquidity Ratio (SLR) by 50 basis points from 23 percent to 22.5 percent. The Cash Reserved Ratio (CRR) remained unchanged at 4%. Both CRR and SLR are considered to be reserves which RBI uses to curb inflation. However, they are not the same and quite different from each other. The major difference being:

1. SLR is the percentage of net demand and time liabilities (NDTL) that the banks are required to maintain. While, CRR is the is a portion of bank's NDTL that the banks are required to be keep in the specified current accounts maintained with the RBI.

2. SLR is maintained either in cash or in assets specified by the RBI which includes gold. CRR is to be maintained only in cash and cash equivalents.

3. SLR regulates credit growth in the economy while CRR controls liquidity in economy. If RBI reduces SLR rate, then the banks have to invest less in buying government securities or any other asset specified by the RBI and thus its lending capacity increases. On the other hand, banks uses CRR to manage the money supply and liquidity in the market. CRR is generally increased to reduce liquidity and decreased to increase liquidity in the market.

4. Banks can earn returns from SLR but do not earn any return on CRR.

5. SLR is maintained in liquid form by the bank itself. However, CRR is maintained by the banks with the RBI. The banks need to keep CRR in specified current accounts with RBI.

In India, bank's SLR rate has been historically higher as they have to bear the government's fiscal deficit. In order to curb fiscal deficit, the government has to borrow from the banks every year.

Click here to read the concept of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).

So, the government's decision for reducing the SLR rate shows that the RBI is confident on the government for the fiscal consolidation in the economy.

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