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The SARB fulfils its constitutional mandate to protect the value of the rand by keeping inflation low and steady.Monetary policy is the means by which central banks manage the money supply to achieve their goals. The SARB uses interest rates to influence the level of inflation. National Treasury, in consultation with the SARB, sets the inflation target, which acts as a benchmark against which price stability is measured. The SARB then independently makes monetary policy so as to achieve this target. The basic aim of monetary policy is to determine how much money an economy should have in circulation. The monetary policies of countries may differ, but most major economies aim for low and stable inflation, and have publicly announced inflation targets. To protect the value of the rand, the SARB uses inflation
targeting, which aims to maintain consumer price inflation between 3% and 6%. The value of the currency is therefore protected relative to domestic consumer prices. Monetary policy is implemented by setting a short-term policy rate – the repo rate. This affects the borrowing costs of the financial sector, which, in turn, affect the broader economy. The repo rate is so called because banks give the SARB an asset, such as a Government bond, in exchange for cash. They can later repurchase (repo) that asset at a lower price, which reflects the interest they paid (i.e. the repo rate) to have the cash. Inflation Targeting Framework South Africa formally introduced inflation targeting in February 2000. This is a framework in which the central bank uses monetary policy tools, especially the control of short-term interest rates, to keep inflation in line with a given target. South Africa's inflation target range is 3−6%.
Before adopting the inflation-targeting framework, the SARB used several different frameworks, including exchange rate targeting and money supply targeting. The inflation-targeting approach has been more successful. It has permitted a more realistic alignment between the SARB’s tools and objectives. It has also enhanced transparency and accountability by giving the SARB a clear and publicly visible objective.  Latest Updates
Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash. Click here to know about SLR & Repo Rate. Current cash reserve ratio is at 4%, this will be changed to 4.5% from May 21st. Objectives of Cash Reserve RatioThe Cash Reserve Ratio serves as one of the reference rates when determining the base rate. Base rate means the minimum lending rate below which a bank is not allowed to lend funds. The base rate is determined by the Reserve Bank of India (RBI). Pro Tip: Invest in direct funds pay 0% commission and earn upto 1.5% extra returns Invest Now The rate is fixed and ensures transparency with respect to borrowing and lending in the credit market. The Base Rate also helps the banks to cut down on their cost of lending to be able to extend affordable loans. Apart from this, there are two main objectives of the Cash Reserve Ratio:
How does Cash Reserve Ratio workWhen the RBI decides to increase the Cash Reserve Ratio, the amount of money that is available with the banks reduces. This is the RBI’s way of controlling the excess flow of money in the economy. The cash balance that is to be maintained by scheduled banks with the RBI should not be less than 4% of the total NDTL, which is the Net Demand and Time Liabilities. This is done on a fortnightly basis. NDTL refers to the total demand and time liabilities (deposits) that are held by the banks. It includes deposits of the general public and the balances held by the bank with other banks. Demand deposits consist of all liabilities which the bank needs to pay on demand like current deposits, demand drafts, balances in overdue fixed deposits and demand liabilities portion of savings bank deposits. Time deposits consist of deposits that need to be repaid on maturity and where the depositor can’t withdraw money immediately. Instead, he is required to wait for a certain time period to gain access to the funds. This includes fixed deposits, time liabilities portion of savings bank deposits and staff security deposits. The liabilities of a bank include call money market borrowings, certificates of deposit and investment in deposits in other banks. In short, the higher the Cash Reserve Ratio, the lesser is the amount of money available to banks for lending and investing. NDTL = Demand and time liabilities (deposits) with public sector banks and other banks – deposits with other banks (liabilities) How does CRR affect the economyCash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary policy, which is used to regulate the money supply, level of inflation and liquidity in the country. The higher the CRR, the lower is the liquidity with the banks and vice-versa. During high levels of inflation, attempts are made to reduce the flow of money in the economy. For this, RBI increases the CRR, lowering the loanable funds available with the banks. This, in turn, slows down investment and reduces the supply of money in the economy. As a result, the growth of the economy is negatively impacted. However, this also helps bring down inflation. On the other hand, when the RBI wants to pump funds into the system, it lowers the CRR, which increases the loanable funds with the banks. The banks in turn sanction a large number of loans to businesses and industry for different investment purposes. It also increases the overall supply of money in the economy. This ultimately boosts the growth rate of the economy. Difference between CRR & SLRBoth CRR and SLR are the essential components of the monetary policy. However, there are a few differences between them. The following table gives a glimpse into the dissimilarities:
Why is Cash Reserve Ratio changed regularlyAs per the RBI guidelines, every bank is required to maintain a ratio of their total deposits that can also be held with currency chests. This is considered to be the same as it is kept with the RBI. The RBI can change this ratio from time to time at regular intervals. When this ratio is changed, it impacts the economy. For banks, profits are made by lending. In pursuit of this goal, banks may lend out maximum amounts, to make higher profits and have very little cash with them. An unexpected rush by customers to withdraw their deposits will lead to banks being unable to meet all the repayment needs. Therefore, CRR is vital to ensure that there is always a certain fraction of all the deposits in every bank, kept safe with them. While ensuring liquidity against deposits is the prime function of the CRR, it has an equally important role in controlling the interest rates in the economy. The RBI controls the short-term volatility in the interest rates by adjusting the amount of liquidity available in the system. Too much cash in the economy leads to the RBI raising interest rates to bring down inflation, while the scarcity of cash leads to the RBI cutting interest rates, to stimulate growth in the economy. Thus, as a depositor, it is good for you to know of the CRR prevailing in the market. It ensures that regardless of the performance of the bank, a certain percentage of your cash is safe with the RBI. Current Repo Rate and its impactApart from CRR, there are other metrics used by RBI to regulate the money supply in the economy. RBI revises the repo rate and the reverse repo rate in accordance with the fluctuating macroeconomic conditions. Whenever RBI modifies the rates, it impacts each sector of the economy; albeit in different ways. Changes in the repo rates can directly impact big-ticket loans such as home loans. An increase/decrease in the repo rates can result in banks and financial institutions revising their MCLR proportionately. The MCLR (Marginal Cost of Funds Based Lending Rate) is the internal reference rate that helps banks find out the interest they can levy on loans. A decline in the repo rate can lead to the banks bringing down their lending rate. This can prove to be beneficial for retail loan borrowers. However, to bring down the loan EMIs, the lender has to reduce its base lending rate. As per the RBI guidelines, banks/financial institutions are required to transfer the benefit of interest rate cuts to consumers as fast as possible. Related ArticlesRepo rate – Meaning, Reverse Repo Rate and Current Repo Rate Statutory Liquidity Ratio (SLR)
Invest in Direct Mutual Funds Save taxes upto Rs 46,800, 0% commission What happens when a country's central bank increases reserve requirements?By increasing the reserve requirement, the Federal Reserve is essentially taking money out of the money supply and increasing the cost of credit. Lowering the reserve requirement pumps money into the economy by giving banks excess reserves, which promotes the expansion of bank credit and lowers rates.
What happens to banks when the reserve requirement is increased?Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.
What happens when the central bank increases the bank rate?If the Fed raises interest rates, it increases the cost of borrowing, making both credit and investment more expensive. This can be done to slow an overheated economy. If the Fed lowers rates, it makes borrowing cheaper, which encourages spending on credit and investment.
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What happens when a countrys central bank increases reserve requirements for banks
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