ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The Taxing Problem: Future of the Cash Reserve Ratio

There is an implicit tax in the application of the cash reserve ratio and when applied on a uniform basis between banks it is also regressive and discriminatory. The imposition of the CRR results in forgone income and it is estimated that a one percentage point increase in the ratio can reduce the multiplier effect on this income by 0.94 percentage points. This would translate in 2009 into forgone income equivalent to about 2.6% of total profits of the commercial banks. The problem is that non-payment of interest on CRR balances has magnified the tax impact of this instrument. The central bank could consider alternatives such as a slab system and concessional treatment of rural and cooperative institutions, so that the tax impact of CRR is made progressive and discriminates between institutions.

MONEY MARKET REVIEW

The Taxing Problem: Future of the Cash Reserve Ratio

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