A case for paying interest on CRR balances

.....In the current situation, if 8-9 per cent interest is paid on the balance kept with the RBI, banks will most likely rush to keep funds with central bank and that will reduce the liquidity in the system. It may be noted that banks maintain 6-7 percentage points more SLR than the required 23 per cent when the risk-free return on SLR securities is 8-9 per cent. Therefore, it can be safely assumed that if 8-9 per cent interest is paid liquidity will automatically flow from the system to the RBI. The liquidity impounded will be 10-12 times the interest paid. Similarly, when the system requires more liquidity, the interest paid on the balances kept with RBI may be reduced which will compel the banks to draw the funds from their accounts with the RBI and use for advances or investment......

Red - HBL