The Tarapore Committee on rupee float has asked the Reserve Bank of India (RBI) to use cash reserve ratio (CRR) and statutory liquidity ratio (SLR) to suck out excess liquidity from the system."To the extent the RBI assesses the excess liquidity to be more than transient, it should also use the CRR and SLR," the committee, which recommended relaxation of capital controls on the Rupee in three phases spread over five years starting this fiscal, said.While CRR is the reserve which a bank has to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), SLR is the one that a bank has to maintain in the form of cash, gold or approved securities with the RBI.Where there is a large increase in liquidity and credit expansion way above the trend line, bank profitability is higher and the banks can be legitimately expected to bear a part of the burden of containing the deleterious expansion of liquidity, these two instruments could be used, the committee said.Nowadays, CRR and SLR are seldom used by the RBI which relies more on repo rates at which banks park their short term funds with the RBI and vice versa.In fact, the repo rates are being used more often than even the bank rate, which is the rate at which the central bank offers refinance to the commercial banks.
