How Cash Reserve Ratio affects loan rates?

The Cash Reserve Ratio is the amount of funds that the banks are bound to keep with Reserve bank of India. Present CRR is 6.0 per cent. It has been raised by 25 basis points from 5.75 to 6.00. RBI uses the method of CRR hike to drain out the excess liquidity from the banks. This is because; the banks will now have to keep more money with the Reserve Bank of India. On this money banks don`t earn any interest. Since they don’t earn any interest, the banks are left with an option to increase the interest rates. The increased rate may or may not be seen sooner or later in case of the present hike of 25 basis points, but if RBI hikes this rate substantially, banks will have to increase the rates. The home loans, car loans and EMI of floating Rate loans increase. The latest move by RBI of increasing the CRR will be sucking excess liquidity of 12500 crores of Rupees. This is the extra amount which now the banks will keep in the Central Bank.

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