what do you mean by variable cash reserve ratio?
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Variable Cash Reserve Ratio Method of Credit Control used by Central Banks! ... The minimum balances to be maintained by the member banks with the central bank are fixed by law and statutory powers have been conferred on the central bank to alter the quantum of these minimum reserves.
The variable cash reserve ratio is comparatively new method of credit control used by central banks in recent times. In 1935, the U.S.A.’s Federal Reserve System adopted it, for the first time. In countries where the money market is unorganised or underdeveloped, increasing recourse is now taken to this method of credit control.
Therefore, the reserve requirement ratio is a powerful instrument which affects the volume of excess reserves with commercial banks as well as credit creation multiplier of the banking system. To clarify the point, suppose commercial banks have Rs. 10 crores of total reserve funds with the central bank and that the legal cash reserve ratio is 10 per cent of the total deposits If, with the existing deposits, the required reserves of the banks are Rs. 3 crores, the excess reserves amounting to Rs. 7 crores will support a tenfold (the multiplier being ten, as the reserve ratio is ten per cent) increase in the deposits, i.e. Rs. 70 crores of credit creation (Rs. 7 x 100/10 crores). If, on the other hand, the reserve ratio is doubled, i.e., if it is raised to 20 per cent, the required cash reserves are Rs. 6 crores, and the excess reserves would be Rs. 4 crores only.
This excess reserve of Rs. 4 crores, with the 20 per cent reserve requirements, would obviously support only a fivefold (the multiplier now being 5) increase in the bank deposits i.e., Rs. 20 crores of credit creation only (i.e., Rs. 4 x 100/20 crores). Thus, raising of the reserve requirements affect credit contraction, and conversely, a reduction in the reserve ratio brings about credit expansion