What Is Cash Reserve Ratio (CRR) ?

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What is Cash Reserve Ratio (CRR)?

Cash Reserve Ratio is a prescribed percentage of bank deposits which banks are required to
keep with Central Bank in the form of reserves or balances.

The two main objectives of CRR are:

a. That banks should have sufficient cash at all times to meet the payment demands of
their deposit customers; and
b. It is a tool of monetary policy to control money supply in the economy. Higher the CRR
with the Central Bank, lower will be the liquidity in the system. On the other hand, banks
have more money to themselves if Central Bank lowers the CRR leading to higher
liquidity in the system.

CRR is Cash Reserve Ratio. CRR is the percentage of money the banks have to keep

with Reserve Bank of India (RBI).


Let me take an example. See the image below:

What is CRR Cash Reserve Ratio


In the above image, the CRR is 6%. A man deposits Rs. 1000 in his bank. Since CRR is 6%
and 6% of 1000 is Rs.60/-, the bank has to keep Rs.60/- with RBI and is left with only 1000-
60 = Rs.940/- to be given as loans and make money.

Cash Reserve Ratio (CRR) in India

In terms of Section 42(1) of the RBI Act, 1934 the Reserve Bank, having regard to the needs
of securing the monetary stability in the country, prescribes the Cash Reserve Ratio (CRR) for
Scheduled Commercial Banks (SCBs) without any floor or ceiling rate.
So What may happen to banks?

In the short term for at least 2-3 months there is going to be a liquidity crunch, so the loans
limit will get reduced. Of course withdrawals limits may not get effected as it is a very small
percentage of the money taken out from the banks. But business, home and personal loan
limits will defiantly get reduced.

As a result of this, the next quarter results of banks is surely going to be less than the same
quarter of the previous year.

What happens when CRR is increased?


When CRR is increased , it decreases money supply, Increases interest rates on home loans,
car loans etc. and in inter-bank market, Increases demand for money and decreases inflation.

Cash Reserve Ratio (CRR)

April 24, 2022


3.00%
1.00% on Mar 28, 2020
1 Yr ago 5 Yr ago 10 Yr ago
3.00% 4.00% 4.75%

Current CRR Rate

The current Cash Reserve Ratio (CRR) is 3.00%

. The Cash Reserve Ratio (CRR) last witnessed a change in its level on March 28, 2020 when
it declined by 1.00% from its previous level of 4.00%.

How does Cash Reserve Ratio work

When the RBI decides to increase the Cash Reserve Ratio, the amount of money that is

available with the banks reduces. This is the RBI’s way of controlling the excess flow of

money in the economy. The cash balance that is to be maintained by scheduled banks with

the RBI should not be less than 4% of the total NDTL, which is the Net Demand and Time
Liabilities. This is done on a fortnightly basis.
NDTL refers to the total demand and time liabilities (deposits) that are held by the banks. It

includes deposits of the general public and the balances held by the bank with other banks.

Demand deposits consist of all liabilities which the bank needs to pay on demand like current

deposits, demand drafts, balances in overdue fixed deposits and demand liabilities portion of

savings bank deposits.

How does CRR affect the economy

Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary policy,

which is used to regulate the money supply, level of inflation and liquidity in the country.

The higher the CRR, the lower is the liquidity with the banks and the lower the CRR the

higher is the liquidity with the banks. During high levels of inflation, attempts are made to

reduce the flow of money in the economy.

For this, RBI increases the CRR, lowering the loanable funds available with the banks.

On the other hand, when the RBI wants to pump funds into the system, it lowers the CRR,

which increases the loanable funds with the banks.

CRR in inflation

CRR refers to the ratio between cash reserves of the commercial banks with central bank and their
total deposits. During inflation, CRR is raised. A rise in CRR reduces the reserves of high powered
money with commercial banks. This reduces the credit creation capacity. Accordingly aggregate
demand falls, as required to correct inflationary gap in the economy.
Impact of Cash Reserve Ratio (CRR) on Interest Rate
If there is an increase in the cash reserve ratio, a bank will a low lending capacity in terms of
funds. Hence, banks will ask more people to open deposits in their bank accounts. Banks will
also raise the interest rate and this step will discourage borrowers from applying for loans due
to the increased interest rate. This is because high-interest rates indicate higher loan expenses.

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