What is legal Reserve Ratio? Explain its components.
Legal reserve ratio refers to the minimum fraction of deposits which the banks are mandated to keep as cash themselves. The legal reserve ratio is fixed by central bank. Legal Reserve Ratio has two components:
Cash Reserve Ratio (CRR)-It refers to the cash reserves of Commercial Banks with the Central Bank as a percentage of their deposits.
Statutory Liquidity Ratio (SLR) refers to reserves in the form of liquid assets (including (i) cash, (ii) gold, and (iii) approved securities) with the Commercial Banks themselves, as a percentage of their total deposits.
Both CRR and SLR are fixed by the Central Bank, and both are legally binding for the Commercial Banks. In this sense, both CRR and SLR are legal reserve ratios.