RBI thus has certain quantitative and qualitative tools through which it manages liquidity and they are as follows:
Cash Reserve Ratio (CRR)
Every bank has to retain a certain percentage of its demands and time liabilities in cash with the RBI which can be raised by the RBI to drain out excess liquidity or reduced to release the liquidity in the economy.
CRR as a monetary tool which has to be carefully used by the RBI keeping in view all aspects of the economy and not merely decreasing liquidity for fears of inflation. Frequent use of the CRR, especially their increase by any central bank of a country sends negative sentiments in the economy. Changes in CRR are necessary in exceptional circumstances or adverse developments in the economy rather than being frequently used as a monetary tool for managing liquidity.
Statutory Liquidity Ratio (SLR)
This is another monetary tool of the RBI, in terms of which every bank is required to set aside again a certain percentage of their demand and time liabilities and retain as cash with RBI, or in gold with the RBI or invested in government securities. The banks prefer to invest in government securities as it earns them interest. At present, a minimum 20% (effective from August 2017) time liabilities are to be invested. Banks have, however, parked greater than the minimum stipulation in government securities and is thus today an in-effective tool to managing liquidity.
Bank Rate
It is the
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