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Understanding Cash Reserve Ratio (CRR)

The Cash Reserve Ratio is the amount of funds that banks must keep with the Reserve Bank of India based on their demand and time liabilities. Currently, the CRR is set at 5.5%. When the CRR is reduced, banks have more funds available to deploy and offer lower interest rates on loans. Conversely, increasing the CRR removes excess liquidity from banks by requiring them to keep more reserves with the central bank, which can force banks to raise interest rates on loans to maintain profitability. The Reserve Bank of India frequently adjusts the CRR level to manage money supply and credit growth in the economy.

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52 views1 page

Understanding Cash Reserve Ratio (CRR)

The Cash Reserve Ratio is the amount of funds that banks must keep with the Reserve Bank of India based on their demand and time liabilities. Currently, the CRR is set at 5.5%. When the CRR is reduced, banks have more funds available to deploy and offer lower interest rates on loans. Conversely, increasing the CRR removes excess liquidity from banks by requiring them to keep more reserves with the central bank, which can force banks to raise interest rates on loans to maintain profitability. The Reserve Bank of India frequently adjusts the CRR level to manage money supply and credit growth in the economy.

Uploaded by

Bharat Kumar
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© © All Rights Reserved
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Articles of General Knowledge Today

Cash Reserve Ratio


2011-04-21 10:04:40 GKToday

The Cash Reserve Ratio is the amount of funds that the banks are bound to keep with Reserve bank of
India, with reference to the demand and time liabilities (NDTL) to ensure the liquidity and solvency of the
Banks. Please note that earlier RBI was empowered to fix RBI between 3-20% by notification. However, from
2006 onwards the RBI is empowered to fix the CRR on its discretion without any ceiling. The CRR is
maintained fortnightly average basis.

Please note that RRBs (Regional Rural Banks) maintain the same CRR as Scheduled Commercial Banks
from 2002 onwards). Current CRR is 5.5%

What is impact of reducing CRR?

When CRR is reduced, more funds are available to banks for deploying in other business as they
have to keep fewer amounts with RBI. This means that the banks would have more money to play
and this leads to reduction of interest rates on Loans provided by the Banks.

What is impact of Hiking CRR?

RBI uses the method of CRR hike to drain out the excess liquidity from the banks. This is because; the
banks will now have to keep more money with the Reserve Bank of India. On this money banks don`t earn
any / much interest. Since they don't earn any interest, the banks are left with an option to increase the
interest rates. If RBI hikes this rate substantially, banks will have to increase the loan interest rates. The
home loans, car loans and EMI of floating Rate loans increase.

The following Graphic shows the history of CRR since 2000.

The above graphic shows that RBI has used this tool to contain the money supply and credit creation
more frequently. Highest CRR was 9% when the Global Financial Slowdown had started taking definite
shape. During the slowdown years the CRR was reduced gradually so that Banks have more money with
them. Once, the signs of recovery are shown clearly, RBI made it again a little higher. In January 2012,
RBI reduced the CRR to 5.5%.

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