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‘Personal’ CRR is essential, hedge it

Author: Venkata Ravi Ram/Wednesday, May 9, 2018/Categories: Currency, Expert View

‘Personal’ CRR is essential, hedge it

‘Cash is king’ is an old adage. There are umpteen situations that cry “cash-only”. One may yawn and yelp, cash?! Oh, so old-fashioned, I have apps. But, even in these modern (sorry, digital) times, there are still umpteen situations that cry “cash-only”. Quick, think of all emergencies that can force you to use cash. Here are a few to help jog your memory, ATMs running dry, cards not working, cards not accepted, bank holiday, cyclone, accident, medical emergency, loss of job and, the mother of all, (just in case you have forgotten) demonetisation.

The RBI insists all banks keep some cash with them as a safekeeping. This is called Cash Reserve Ratio (CRR) and ensures that banks have access to quick money against deposits. That’s for the banks. What about you? Do you need a personal CRR? The simple answer is a ‘yes’! If you still have doubts, re-read the first para. 

Not only you need cash, you need it in different practical denominations. Imagine after a natural disaster like say, Cyclone. Needing some milk, you go out, find after significant effort, one person selling a milk packet for Rs.100. You have a Rs.500 note and he doesn’t (conveniently for him) have change to give you! Would you take the milk or, search again with very high chance of not finding milk at all? Hence, the need for “change”.

Next logical query would be: how much is enough? Well this varies as per personal situations, but generally accepted norm is six months of expenses. Six months is general time for someone to get employed after losing a job, recover from an accident/fracture etc. Shocked at the potential amount? Wait, that is not six months of ‘earnings’, it is six months of ‘expenses’. The cash should be enough to cover essential stuff like paying for household help, milk, vegetables, fruits, groceries, insurance premia, school/college fees, transport to office/school/college and EMIs (if you have loans). You get the drift. The expenses include all the “needs” only without which your routine life would be derailed. Doesn’t include, “wants”. 

How & where to keep it? Once you identify all such expenses, start saving for it, in case you don’t have that liquidity immediately. Three months CRR may be maintained in a liquid mutual fund that invests primarily on g-secs. That way even if there is run on your bank, (there were two runs on ICICI bank in the past), you still get that money and if a banking system shutdown should last more than that, no amount of planning would save any of us.

Keep the other three months CRR in form of liquid cash only. Put it in a separate cover/box/wherever-you-prefer, mark it as emergency funds and importantly let your family members know how to access it. In an emergency, you may not be the person to control that money and marking it clearly would ensure that it won’t get mixed-up and get spent for routine stuff. Finally, ensure that the cash reserve includes different denominations esp., lower denominations.

Well, you did great, that was not so difficult was it? Breathe easy, cash is a cinch now!  

The author is an independent commentator of finance and economy

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Venkata Ravi Ram
Venkata  Ravi Ram

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