Excess Reserves Held by Commercial Banks

Excess reserves refer to the reserves held by commercial banks over and above the statutory minimum mandated by the central bank. In India, the Reserve Bank of India (RBI) is the central bank, and it sets the statutory minimum reserve requirement for commercial banks.

Explanation

Commercial banks are required to maintain a certain percentage of their deposits as reserves with the central bank. This reserve requirement is set by the central bank and varies from country to country. In India, the RBI sets the Cash Reserve Ratio (CRR), which is the percentage of deposits that commercial banks must maintain as reserves with the RBI.

Excess reserves refer to the reserves that commercial banks hold over and above the CRR. These reserves are not required by the central bank, but are held by the banks voluntarily. Banks may hold excess reserves for several reasons, such as to meet unexpected withdrawal demands from customers, to earn interest on excess funds, or to have a cushion against unexpected losses.

The RBI pays interest on the excess reserves held by commercial banks, which is known as the Reverse Repo Rate. This rate is usually lower than the repo rate, which is the rate at which the RBI lends money to commercial banks. The difference between the repo rate and the reverse repo rate is known as the Marginal Standing Facility (MSF) rate.

Conclusion

In conclusion, excess reserves are the reserves held by commercial banks over and above the statutory minimum reserve requirement set by the central bank. Commercial banks hold excess reserves voluntarily, and may do so for several reasons. The RBI pays interest on excess reserves held by commercial banks, which is known as the Reverse Repo Rate.