ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

1). INTRODUCTION:

a). Introduction of the automobile industry: India was the sixth largest motor vehicle/car manufacturer in
the world in 2013. Indian auto manufacturers produced a record 20.4 million motor vehicles in 2011-12
(March-April). 3.124 million passenger vehicles rolled out from Indian auto plants in 2011-12. India is the
largest manufacturer of three-wheelers (8,78 ,000 in 2011- 12) and the eighth largest commercial
vehicle (9,12 ,000 in 2011-12) while two-wheeler production reached 15.45 million units. India is the
largest tractor manufacturing country (around 1/3 of global output) with a total estimated production of
605,000 units in 2011-12. Construction vehicle production was approx. 48 000 in 2010-11. 2.55 million
Passengers cars were sold in India in 2013.

India is the second largest motorcycle (6.54 million produced in 2007-08) and the fourth largest
commercial vehicle manufacturer in the world. Auto exports amounted to almost USD 2.3 billion in the
year 2005-06. Over 13 million people work directly or indirectly in the auto industry. Indian car exports
amounted to 5,50,000 units in 2013-14. Hyundai India was the largest exporter of cars at 2,33 ,000 units
followed by Nissan (116 000 cars), Maruti Suzuki (1,00,000 cars) and Toyota Kirloskar (27000 cars).
Motorcycle exports amounted to 1.98 million units along with 94,000 scooters. The total turnover of the
Indian automotive component industry was estimated at USD 35 billion in 2013-14. Auto ancillary
exports fetched USD 10.2 billion in the same year while the total turnover of India's vehicle tyre industry
amounted to an estimated Rs 450 billion in 2013-14. The total number of registered motor vehicles on
Indian roads reached 160 million in 2012 of which over 21.5 million were cars, taxis and jeeps.
Established auto manufacturers and new entrants in the Indian auto market are expanding their
production capacities on a large scale. Companies undergoing expansion include Maruti-Suzuki, General
Motors (GM), Tata Motors, Volks Wagon(VW) Group, Toyota, Honda and Hyundai. The Renault-Nissan
Alliance's maiden auto plant near Chennai commenced its production in 2010. A second plant is
planned. New auto makers planning to enter the Indian market include Isuzu, Jeep and possibly Mazda.
The Indian automobile industry seems to come a long way since the first car that was manufactured in
Mumbai in 1898. The automobile sector today is one of the key sectors of the country contributing
majorly to the economy of India. The automobile industry is one of India’s most vibrant and growing
industries. This industry accounts for 22 percent of the country's manufacturing Gross Domestic Product
(GDP). The auto sector is one of the biggest job creators, both directly and indirectly. It is estimated that
every job created in an auto company leads to three to five indirect ancillary jobs. India's domestic
market and its growth potential have been a big attraction for many global automakers. India is
presently the world's third largest exporter of two-wheelers after China and Japan. Two-wheeler sales
are projected to rise from 15.9 million in FY 2013 to 34 million by FY 2020. The segment registered a
growth of 7.31 percent in FY 2014. Furthermore, passenger vehicle sales are expected to increase to 8.6
million in FY 2021 from 3.2 million in FY 2013. According to a report by Standard Chartered Bank, India is
likely to overtake Thailand in global auto-export market share by the year 2020. Strong growth in
demand due to rising income, growing middle class, and a young population is likely to propel India
among the world's top five auto manufacturers by 2015. Automobile export volumes increased at a
Compound Annual Growth Rate (CAGR) of 19.1 percent during FY 2005-2013, out of which two-wheelers
accounted for the largest share in exports at 67 percent in FY 2013.

b). Findings on the growth trend of the Industry for last six years:
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

In the last decade again, various trade and investment restrictions were
removed to speed up momentum for large-scale production. As of today, the
government encourages foreign investment and allows 100% FDI in the sector
via the automatic route. The industry is fully de-licensed, and free imports of
automotive components are allowed. India is the second fastest-growing market
for automobiles and components globally (after China) .

With an outward vision of component makers, and competitive pressures from

international firms, the component industry had to upgrade process and
product qualities and technology standards to gain and sustain
capabilities.26 Many manufacturers now adhere to the global environmental
norms regarding emission/technological standards and quality certifications.
The industry grew by around 20% annually in the 1990s, and the average
annual growth of exports was around 15% during that period. Over the years, it
has been able to modernize its technology and improve quality and has
developed capabilities to manufacture components for new-generation vehicles.
Indian companies maintained their traditional strengths in casting, forging and
precision machining, and fabricating (welding, grinding, and polishing) at
technology levels matching the required scale of operations. They achieved
significant success in garnering engineering capabilities and adapted to local
requirements through local design. High growth has taken place in engine, drive
transmission, and steering parts. Engine parts, being high value-added in its
nature, have been contributing most to total production. Endowed with the
potential of low-cost quality products, India edges over many other developing
countries in component manufacturing.

Table 3 below provides the category-wise trends for automobile production,

domestic sales, and exports (in numbers) from 2011–2012 to 2016–
2017. Further, using estimates from the SIAM of India, it is calculated that
between 2001 and 2018, the CAGR of export of all vehicles from India was
20.02%. The estimates for other parameters – production, domestic sales, and
exports – as percentage of production are given under Table 4. Comparable data
for the selected categories before 1995 is not available. However, calculations
have been made by other authors for earlier periods and different segments.
Table 3
Automobile trends in India, 2011–2018
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

Category 2011– 2012– 2013– 2014– 2015–2016 2016– 2017

2012 2013 2014 2015 2017 –
2018

Passenge Produ 31,46, 32,31,05 30,87,97 32,21,41 34,65,045 38,01,6 40,10,

r ction 069 8 3 9 70 373
vehicles
Dome 26,29, 26,65,01 25,03,50 26,01,23 27,89,2 30,47,582 32,87,
stic 839 5 9 6 08 965
sales

Expor 5,08,7 5,59,414 5,96,142 6,21,341 6,53,053 7,58,72 7,47,2

ts 83 7 87

Commer Produ 9,29,1 8,32,649 6,99,035 6,98,29 7,86,692 8,10,25 8,94,5

cial ction 36 8 3 51
vehicles
Dome 8,09,4 7,93,211 6,32,851 6,14,948 6,85,704 7,14,08 8,56,4
stic 99 2 53
sales

Expor 92,258 80,027 77,050 86,939 1,03,124 1,08,27 96,86

ts 1 7

Three- Produ 8,79,2 8,39,748 8,30,108 9,49,019 9,34,104 7,83,72 10,21,

wheelers ction 89 1 911

Dome 5,13,2 5,38,290 4,80,085 5,32,626 5,38,208 5,11,87 6,35,6

stic 81 9 98
sales

Expor 3,61,75 3,03,08 3,53,392 4,07,60 4,04,441 2,71,89 3,81,0

ts 3 8 0 4 02

Two- Produ 1,54,27 1,57,44,1 1,68,83,0 1,84,89, 1,88,30,227 1,99,33, 2,31,4

wheelers ction ,532 56 49 311 739 7,057

Dome 1,34,0 1,37,97,1 1,48,06,7 1,59,75,5 1,64,55,851 17,589, 20,192

stic 9,150 85 78 61 738 ,672
sales

Expor 19,75,1 19,56,37 20,84,00 24,57,46 24,82,876 23,39,2 28,15,

ts 11 8 0 6 73 016

Total Produ 2,03,8 2,06,47, 2,15,00,1 2,33,58, 2,40,16,068 2,53,29 2,90,7

ction 2,026 611 65 047 ,383 3,892
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

Category 2011– 2012– 2013– 2014– 2015–2016 2016– 2017

2012 2013 2014 2015 2017 –
2018

Dome 1,73,61 1,77,93,7 1,84,23,2 1,97,24,3 2,04,68,971 2,18,62, 2,49,7

stic ,769 01 23 71 128 2,788
sales

Expor 29,37, 28,98,9 31,10,584 35,73,34 36,43,494 34,78,2 40,40,

ts 905 07 6 68 172

Table 4
Segment-wise estimates of CAGR

Production

Category 1995–2000 2001–2010 2011–2018 2001–2018

Passenger vehicles 6.82 15.01 3.53 11.10

Commercial vehicles −6.91 14.91 −0.54 10.55

Three-wheelers 1.62 12.60 2.17 9.67

Two-wheelers 7.18 10.53 5.97 10.45

Grand total 6.19 11.41 5.21 10.51

Domestic sales

Category 1995–2000 2001–2010 2011–2018 2001–2018

Passenger vehicles 9.80 12.52 3.31 9.76

Commercial vehicles −6.96 15.41 0.81 10.94

Three-wheelers 2.28 9.15 3.10 7.03

Two-wheelers 7.10 9.24 5.99 9.63

Grand total 6.57 9.91 5.32 9.60

Exports

Category 1995–2000 2001–2010 2011–2018 2001–2018

ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

Passenger vehicles   27.50 5.65 17.23

Commercial vehicles   15.96 0.70 13.14

Three-wheelers   30.79 0.74 20.74

Two-wheelers   30.45 5.19 21.40

Grand total   29.06 4.66 20.02

Exports as percentage of production

Category 1995–2000 2001–2010 2011–2018 2001–2018

Passenger vehicles   10.87 2.04 5.52

Commercial vehicles   0.92 1.25 2.34

Three-wheelers   16.16 −1.40 10.10

Two-wheelers   18.03 −0.73 9.91

Grand total   15.85 −0.52 8.60

d). Factors Responsible for the growth of the Automobile Industry in India:

There are many reasons for the impressive growth achieved by Indian manufacturers over the
last two decades. These are discussed in detail in the next section. The main strengths have been
a large unsaturated domestic market for small cars (and presence of a large middle economic
class), low production costs (on account of availability of low-cost labor and other inputs), and
skilled engineering talent. Global affiliations and tie-ups also enabled technology upgrading and
expansion of scale of production in the industry.

In the passenger car segment, there are more than 30 international quality models in the market,
some of which are now being exported to MNCs’ home markets. Leading Indian manufacturers
are in the process of transforming from local players to global companies. India’s domestic
carmakers, viz., Tata Motors, M&M, and Ashok Leyland, have developed manufacturing
facilities, significant R&D, technology development, and testing centers.34 In addition, Indian
companies have bought capacity or made alliances with other manufacturers in East Asia, South
America, Africa, and Europe.

Low cost of labor and economies of scale have made India an ideal export hub for small cars.
The Indian auto industry is expected to be the world’s third largest automotive market by volume
by 2026.35 Promotion of exports has been part of companies’ business strategies for better
utilization of installed capacities.36 Low cost of manufacturing and economies of scale achieved
as a result of catering to overseas markets have allowed vehicle makers to become competitive
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

and offset weak demand in the domestic market. Companies which have had partnerships with
foreign players or received FDI have benefited in terms of engagement in GVCs.

4 Role of the Government
The automobile industry has in many ways been shaped by the Indian Government’s policy and
nurtured in microeconomic environment it helped to create. Apart from the direct impact through
fiscal policy instruments, the industry policy even influenced firm-level learning processes and
shaped technological capability accumulation.37

Since 1970, the Indian Government gradually added the automotive industry to a list of its core
or “pillar” industries, recognizing it as a significant driver to achieve economic growth since it
had many forward and backward linkages.38 The industry began to be prioritized in the
manufacturing sector for promotion and favorable policy support to promote productivity. In
1975, as a general industrial policy, the government permitted an automatic capacity expansion
by 25% every 5 years and removed price controls.39

The share of commercial vehicles and passenger car segment also changed in response to policy
changes. Indian policy had favored the development of the commercial vehicles industry, i.e.,
light and heavy vehicles (for public transport of goods and passengers), as opposed to the
development of passenger vehicles. Cars in particular were considered as luxury goods.40 By the
early 1980s, the government had realized the need to develop the passenger vehicle segment and
took decisions like permitting increased foreign capital and overseas collaborations and reduced
production licenses on manufacturing operations. In 1981, the policy of “broad-banded” licenses
was announced – permitting vehicle manufacturers to produce different kinds of vehicles instead
of just one kind decreed earlier. Firms were allowed greater flexibility in operations through
policies such as minimum economic scale requirements, exemption from detailed Monopolies
and Restrictive Trade Practices (MRTP) Act41 notification procedures. The components sector
was also de-licensed substantially.42

In the 1980s, government-funded training programs and cluster building also led to changes in
supplier relations, enabling vendor development and effective supply chain management. More
liberal import policies were introduced in 1986 when importers of capital equipment were
allotted about 50% increase in their foreign exchange quota.

In July 1991, the New Industrial Policy was introduced which removed most of the constraints
relating to investment, expansion, and foreign investment in the Indian industry. The system of
industrial licensing was abolished for all (except 18) industries, and the passenger car industry
was de-licensed in May 1993. Foreign investment was allowed on an automatic basis in 34
industries, including the automotive industry. Liberal policies of the 1990s led to the entry of
new competitors and spillover benefits, especially on the technology side, and to increased
expenditure on R&D and a desire to innovate to distinguish products in the market. The time
span between productions of new products shortened rapidly. The policies remained tilted in
favor of the domestic industry as MNCs were still required to make specified capital investments
and meet export obligations. In 2001, the government removed auto import quotas and permitted
100% FDI in the sector. Excise duties were reduced to 24% on passenger cars.
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

High tariffs forced the OEMs to set up parts-manufacturing plants in India. Institutional support
for developing supplier capabilities led to the establishment of flexible supplier relationships
which further helped the industry in building innovation capabilities as well.43 An initiative
specifically targeted in this direction was the setting up of the National Automotive Testing and
R&D Infrastructure Project (NATRIP) under the Automotive Mission Plan 2006–2016 (AMP
2016),44 costing US$ 388.5 million to enable the industry achieve parity with global standards.

The Indian car industrial policy also protected the domestic market by setting up challenges for
firms such as requirements for higher local content. This policy helped the development of basic
capabilities in manufacturing and laid foundations of the auto component supplier industry.45 The
protection policies of the 1980s and 1990s encouraged acquisition of basic production
capabilities.46 Local content requirements or indigenization47 of up to 70% forced OEMs and their
suppliers to make significant capital investments and created a chain of world-class component
suppliers.48,49 The process of indigenization has also been recognized as a key regulation
responsible for enhancing technological capabilities.50 This entailed collaborative effort between
local suppliers and engineers from parent company and led Indian firms toward development of
technological capabilities.

Key interventions undertaken by the government under this plan have been in areas of tariff
policy, infrastructure (improved and expanded road network, development of auto wagon rakes,
creation of few specialized ports in the private sector), R&D (setting up of NATRIP, upgradation
of existing centers), and promotion of electric and hybrid vehicles. Currently, the automobile
manufacturing policy in India is being governed by the Automotive Mission Plan 2016–2026
(AMP 2026),51 which lays down the achievements and targets of the industry by 2026.

5 Other Enabling Factors in the Growth of the Industry

Other enabling factors in the growth of the industry include domestic market demand, FDI, JVs,
and corporations’ competitive strategies.

5.1 Role of Domestic Demand

A growing working population and an expanding middle-class have been the key demand drivers
for automobiles in India. India has the second largest road network in the world at 4.7 million
kilometers. Road development activity has gradually increased over the years with an
improvement in connectivity between cities, towns, and villages in the country. The Government
of India’s policy to set aside substantial investment layout for infrastructure development in
every 5-year plan has included the focus on the development of country’s roads. This has given a
fillip to the demand for cars and other vehicles.

India is home to the second largest population in the world. The estimated population is about
1.3 billion people. The GDP per capita has grown from approximately US$ 1432 in 2010 to US$
1500 in 2012 and US$ 1939 in 2017.52 Factors like increasing disposable incomes in the rural
agriculture sector, presence of a large pool of skilled and semiskilled workers, and a strong
educational system will continue to increase vehicle demand in future.53 It is estimated that by
2020, migration on account of urbanization will be over 140 million.54 India is projected to add
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

over 68 million households to its already significant middle-class by 2030, which would drive an
increased demand for automobiles. The number of registered motor vehicles per 1000 population
was only 167 in 2015.55 These facts point to a huge potential of increasing private vehicle
ownership penetration in the future.

5.2 Impact of FDI
The impact of FDI can be seen in terms of output and productivity, technology, and better
practices, all of which could make the industry more competitive.56 These aspects are discussed
in detail below.

5.2.1 Output and Productivity

FDI has positive impact of output and productivity growth. In the period 1947–1983, the output
growth remained limited. The models of cars sold were unchanged for decades, and foreign
models assembled in the country were primarily European. The number of models manufactured
in the passenger car segment was 2 in 1982–1983, which rose to 8 in 1994–1995 and 28 in 2001–
2002.

The most prominent spillover impact of FDI was on the component industry, whose turnover
more than tripled from 1992–1993 to 2001–2002. Supplier productivity increased as foreign
firms co-located suppliers (i.e., put them in a common area) and required home-country suppliers
to invest in India. Competition was also provided by international MNCs which entered the
sector to serve international assemblers, resulting in increased quality and reliability. This led to
the establishment of a reliable component supplier industry, which encouraged more MNCs to
enter the Indian market after the 1990s.

5.2.2 Technology

A significant infusion of global technology occurred with the entry of foreign firms. The first
192 cars to roll out of the Maruti Suzuki factory in December 1983 were almost entirely
Japanese cars, with only tires and batteries sourced from MRF and Chloride India, respectively.
Localization ambitions of Indian firms were facilitated through 40 JVs between Indian vendors
and Japanese collaborators by the end of the century.57

There were 50 greenfield investment projects58 in the sector between 2000 and 2007.59 In some
clusters such as Pune and Chennai, global OEMs played important or even dominant roles in
technology diffusion and were responsible for development of domestic innovation capability.60

5.3 Role of JVs
As mentioned before, JVs and technical collaboration played a vital role as a source of
innovation for local auto component supplier firms in India. Some important partnerships in the
Indian automobile industry are listed under Table 2.
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

Acquiring knowledge and skills through external collaboration is an efficient way to achieve
innovation within automotive clusters. Collaborations result in frequent interactions, reflected in
acquisition of knowledge, sharing, diffusing, and creation of it. Linkages among settings such as
clusters result in learning through networking and interacting and are seen as important for
innovative activities.61

There are a number of examples in India which have shown that the JV collaboration has been an
efficient way of achieving greater growth in the industry through benefits such as technology
sharing, learning best practices, and training of workers. For instance, MUL’s first established
plant was a close copy of Suzuki’s Kosai plant in Japan in terms of plant layout, equipment, the
organization of production, and operating principle.62 Also, it was the first firm to introduce a
partial “just-in-time” and total quality management in India, which aimed to reduce inventory
cost. MUL followed a strategy of massive investment in the program of vendor development,
involving stable and close supplier relations with its first-tier suppliers (40 top suppliers), equity
participation in key suppliers, and promotion of technical collaboration between its suppliers
with Suzuki’s suppliers in Japan.

Other lead firms63 of Indian origin including the TVS Group, the Rane Group, and Ashok
Leyland Limited have played critical role in the development of the Chennai automobile cluster.
Ashok Leyland Limited, one of the largest manufacturer of commercial vehicles, trucks, and
buses in India and the world, entered into an agreement with Leyland Motors, UK, to
manufacture Leyland vehicles way back in 1950. Brakes India Private Limited was founded in
1962 as a JV between TVS and Lucas Industries Limited of the UK (100% subsidiary of ZF
TRW) and is the largest manufacturer of braking components and systems in India with an
annual turnover of more than US$ 600 million. It exports products to 35 countries and caters to
over 60% of the domestic OEM market. The Rane Group which plays a dominant role in the
component segment has had critical partnerships with foreign firms like ZF TRW (USA) and
NSK and Nisshinbo (Japan) for a long time. Other group firms, such as Brakes India, Sundaram-
Clayton Ltd., Sundram Fasteners Ltd., and Turbo Energy Ltd., were established in the 1960s, as
JVs with British firms. M&M and Bajaj Tempo also operated through JVs and developed quality
products over the years.64

5.4 Firm Strategies, Ownership, and Managerial Vision

In addition to the aforementioned reasons, an important role was played by firm strategies,
ownership, and managerial vision of diversified and big business groups such as the Tata Group
and M&M in building technological capabilities in the sector.65 For instance, the ambition and
vision of Tata’s head Ratan Tata to develop the first “Indian car” and then “people’s car” were
the driving forces behind the development of Tata Indica and Tata Nano. The company’s
diaspora connections and family-owned diversified businesses also facilitated inter-sector
learning and played a significant role.

Firms like Tata Motors and M&M had global aspirations, and their business models were
focused on domestic as well as markets in other countries with similar characteristics such as
those in Africa, Latin America, and South Asia. In 2004, Tata Motors bought the Daewoo’s
truck-manufacturing unit in South Korea. In 2005, Tata acquired 21% share in Hispano
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

Carrocera, SA, a Spanish bus-manufacturing firm. In 2005, M&M acquired Stokes Group, a
leading auto component manufacturer in the UK. In 2008, M&M acquired Jaguar and Rover and
established plants in Malaysia, Kenya, Bangladesh, Spain, Ukraine, and Russia to assemble
knocked-down units exported to these countries. The same model extended to Australia, South
Africa, Italy, and Uruguay. In 2006, M&M formed a JV with Marco Polo, a Brazilian firm to
manufacture and assemble fully built buses and coaches. In November 2017, M&M opened its
new manufacturing plant with an investment of US$ 230 million in Detroit, USA.

The profitability of group-affiliated firms exceeded that of other companies due to advantages
such as greater access to funds, diversified and skilled labor, and other resources. These business
groups or conglomerates were often able to fill the institutional gaps typically found in
developing countries by building institutions for the benefit of group members.66

e). COVID-19 impact on the Industry:

The global pandemic caused by the novel corona virus comes at time when both
the Indian economy and the automotive industry were hoping for recovery. While
the GDP growth forecasts were north of 5.5%, COVID-19 may result in a
negative impact of 1-2% on the expected growth rates. The absolute magnitude
of impact depends on the duration of ongoing lockdown and the impact caused of
this pandemic.

The onset of Covid-19 in India will have a negative impact on the automotive
industry. It is estimated that there will be an overall revenue impact of at least
$1.5 -2.0 bn per month across the industry. Even after we open up, further
decline in passenger vehicles demand is expected with discretionary spend
taking a backseat. This will be coupled with transition to BS-VI norms that will
increase cost of ownership.

Farm sector and two wheelers demand could see a dip but expected to bounce
back in the U fashion. Commercial vehicles are expected to show some
resilience, although this is contingent on government continuing to invest in large
infrastructure projects and the liquidity available with the transportation sector.

The supply chain is expected to adapt quickly as China is coming back faster
than normal, however extended supply chain visibility at Tier 2/3 level is the
biggest risk mitigation factor that vehicle companies will need to work on.

What is the impact?

COVID-19 will impact all stakeholders in the value chain who will experience both
short and medium term impact. This could range from shortage of raw material,
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

shifting of production to other countries, liquidity crunch to delays in availability of

models, deferred launches and shrinkage in consumer demand.

The impact of COVID on the economy & automotive industry could vary
depending on intensity, duration and spread of the outbreak. As a result, the
economy may witness a recovery that is V shape – Quick recovery, U shape –
Impacting whole of 2020 or L shape – 18 months of downturn.

f). Expected measures in terms of Fiscal and monetary policy for the industry to
recover:
https://m.economictimes.com/news/economy/policy/mix-of-both-fiscal-and-monetary-policy-needed-
to-salvage-the-economy-report/articleshow/74677770.cms

https://economictimes.indiatimes.com/industry/auto/auto-news/govt-announces-new-measures-to-
boost-demand-in-auto-sector/articleshow/70806412.cms?from=mdr
ANALYSIS OF THE AUTOMOBILE SECTOR: ECONOMICS PROJECT

COPY THE CONTENT OF FIRST LINK AND THEN SECOND LINK IN THE PROJECT FILE JATIN
BHAGCHANDANI.

2). CONCLUSION OF THE PROJECT:

1.4. Cash Reserve Ratio (CRR): Cash reserve ratio is the percentage of bank deposits banks need to keep
with the RBI. CRR is an instrument, the RBI uses to control the liquidity in the system. Currently, the CRR
is 4 per cent, though the range of permissible CRR is between 3 and 15 per cent. If the CRR is four, this
means that the banks will have to keep Rs 4 with the RBI whenever bank deposits increase by Rs 100.
Higher the CRR, lower the amount of money banks can lend out or invest. So, when the CRR is higher,
lower would be the liquidity and vice versa. It is not necessary that a hike in the CRR would lead to a hike
in loan and advances interest rate. But, a hike in the CRR reduces the supply of credit, when the RBI
hikes the CRR, banks would raise loans and advances interest rates.

Statutory Liquidity Ratio (SLR): Statutory liquidity ratio is the percentage of funds banks need to
maintain in the form of liquid assets at any point in time. But, banks need to maintain these funds in the
form of government securities, bonds or precious metals, and not in the form of cash. Currently, the SLR
is 19.5 per cent. These funds are largely invested in government securities. When the SLR is high, banks
have less money for commercial operations and hence less money to lend out. When this happens, loan
and advances interest rates often rise. When the SLR is low, similarly, loans and advances interest rates
are likely to fall. Both the CRR and the SLR influence the extent to which commercial banks can lend out
money to customers. If the RBI keeps both these rates too high for too long, banks would become
cautious and lend less.

http://www.ijlemr.com/papers/volume3-issue12/1-IJLEMR-33342.pdf

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