The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and interest rates. However, Central banks rarely alter the reserve requirements due to the fact that it would cause immediate liquidity problems for banks with low excess reserves. Instead, open market operations are used. As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits.
An institution that holds reserves in excess of the required amount is said to hold excess reserves.
(Let me give you an example. Let say if CCR= 10% and someone come in with $100. With CCR of 10%, the bank can lend out $90 more dollar. And the person got the $90 can deposit back to the bank. The bank can lend out $81 dollar. The net effect is $1000 flowing around or money creation[1]. With CCR of 20% and $100 for deposit, the money creation will be $500. Thereby, when RBI tighten it's monetary policy by CRR, in effect the bank will not willing to lend out money and demand higher return on the money. And the "hot money" will slow down.
[1]
A = Principle
r = CCR
$A (original $100) + $ A (1-r) (the lend out $90) + $ A (1-r)^2 +..... = Money Creation
Let the bank lend out infinite times. The formula becomes A/r = Money Creation
******************************
The Reserve Bank of India (RBI) is the central bank of India, and was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Since its inception, it has been headquartered in Mumbai. Though originally privately owned, RBI has been fully owned by the Government of India since nationalization in 1949.
RBI is governed by a central board (headed by a Governor) appointed by the Central Government. The current governor of RBI is Dr.Y.Venugopal Reddy (who succeeded Dr. Bimal Jalan on September 6, 2003). RBI has 22 regional offices across India.
The Reserve Bank of India was set up on the recommendations of the Hilton Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for nine years.
Main objectives
Monetary Authority
* Formulates, implements and monitors the monetary policy.
* Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.
Regulator and supervisor of the financial system
* Prescribes broad parameters of banking operations within which the country's banking and financial system functions.
* Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective redressal of complaints by bank customers
Manager of Exchange Control
* Manages the Foreign Exchange Management Act, 1999.
* Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency
* Issues and exchanges or destroys currency and coins not fit for circulation.
* Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
and even providing loan to commercial bank
Developmental role
* Performs a wide range of promotional functions to support national objectives.
Related Functions
* Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
* Banker to banks: maintains banking accounts of all scheduled banks.
* Owner and operator of the depository (SGL) and exchange (NDS) for government bonds.
There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above.
The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and interest rates. However, Central banks rarely alter the reserve requirements due to the fact that it would cause immediate liquidity problems for banks with low excess reserves. Instead, open market operations are used. As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits.
An institution that holds reserves in excess of the required amount is said to hold excess reserves.
(Let me give you an example. Let say if CCR= 10% and someone come in with $100. With CCR of 10%, the bank can lend out $90 more dollar. And the person got the $90 can deposit back to the bank. The bank can lend out $81 dollar. The net effect is $1000 flowing around or money creation[1]. With CCR of 20% and $100 for deposit, the money creation will be $500. Thereby, when RBI tighten it's monetary policy by CRR, in effect the bank will not willing to lend out money and demand higher return on the money. And the "hot money" will slow down.
[1]
A = Principle
r = CCR
$A (original $100) + $ A (1-r) (the lend out $90) + $ A (1-r)^2 +..... = Money Creation
Let the bank lend out infinite times. The formula becomes A/r = Money Creation
******************************
The Reserve Bank of India (RBI) is the central bank of India, and was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Since its inception, it has been headquartered in Mumbai. Though originally privately owned, RBI has been fully owned by the Government of India since nationalization in 1949.
RBI is governed by a central board (headed by a Governor) appointed by the Central Government. The current governor of RBI is Dr.Y.Venugopal Reddy (who succeeded Dr. Bimal Jalan on September 6, 2003). RBI has 22 regional offices across India.
The Reserve Bank of India was set up on the recommendations of the Hilton Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for nine years.
Main objectives
Monetary Authority
* Formulates, implements and monitors the monetary policy.
* Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.
Regulator and supervisor of the financial system
* Prescribes broad parameters of banking operations within which the country's banking and financial system functions.
* Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective redressal of complaints by bank customers
Manager of Exchange Control
* Manages the Foreign Exchange Management Act, 1999.
* Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency
* Issues and exchanges or destroys currency and coins not fit for circulation.
* Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
and even providing loan to commercial bank
Developmental role
* Performs a wide range of promotional functions to support national objectives.
Related Functions
* Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
* Banker to banks: maintains banking accounts of all scheduled banks.
* Owner and operator of the depository (SGL) and exchange (NDS) for government bonds.
There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above.
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