Distinguish between Cash Reserve Requirement and Discount Rate Instruments of Monetary Policy in India.

Distinguish between Cash Reserve Requirement and Discount Rate Instruments of Monetary Policy in India. 

Ans. CRR or the Cash Reserve Ratio is the proportion of Bank’s reserves that they have to hold with the RBI. It is mandatory under law for the banks to hold such reserves with the central bank and the RBI is under law, empowered to stipulate this ratio. This amount of reserves that are held with the RBI is known as Required Reserves. It is a percentage of total demand and time liabilities of banks (demand–short-term reserves, time – long-term reserves). 

Discount Rate: The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank. Different types of loans are available from Federal Reserve Banks and each corresponding type of credit has its own discount rate. The interest rate used in discounted cash flow analysis to determine the present value of future cash flows. The discount rate takes into account the time value of money (the idea that money available now is worth more than the same amount of money available in the future because it could be earning interest) and the risk or uncertainty of the anticipated future cash flows (which might be less than expected).