How do changes in reserve requirements manifest?
Usually through the CRR (cash reserve ratio), a commonly used measure to influence credit creation and money supply. CRR is the proportion of deposits that banks are required to keep with the RBI. Which works better: Repo or CRR? Unlike repo and reverse repo rates, which act as signalling devices, CRR is a blunt instrument that directly acts on liquidity. By raising CRR, the RBI sucks out liquidity from the system and puts upward pressure on interest rates. As a part of monetary tightening, the RBI has raised CRR from 4.5 per cent to 6.5 per cent in recent times. What does the RBI do when openly operating in the market? It sells and buys government securities. These activities are called open market operations (OMO). When inflationary pressures exist, the RBI sells securities to mop up excess cash from the system; and vice-versa in case of tight liquidity/shortage of funds. You mentioned ‘transmission mechanism’. What’s that? It is the ‘how’ of monetary policy impacting the economy thr
