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Cash Reserve Ratio (CRR)

The Cash Reserve Ratio (CRR) refers to the percentage of Net Demand and Time Liabilities (NDTL) that banks are required to maintain as cash reserves with the Reserve Bank of India (RBI). Currently, the CRR is set at 3% by the RBI, one of the lowest levels since 1976. The RBI uses the CRR as a monetary policy tool to control money supply and inflation - when inflation is high, it may raise the CRR, reducing banks' lending capacity and excess money in the system.

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153 views2 pages

Cash Reserve Ratio (CRR)

The Cash Reserve Ratio (CRR) refers to the percentage of Net Demand and Time Liabilities (NDTL) that banks are required to maintain as cash reserves with the Reserve Bank of India (RBI). Currently, the CRR is set at 3% by the RBI, one of the lowest levels since 1976. The RBI uses the CRR as a monetary policy tool to control money supply and inflation - when inflation is high, it may raise the CRR, reducing banks' lending capacity and excess money in the system.

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Dhaval224
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Cash Reserve Ratio (CRR)

• Banks need to maintain a certain percentage of their Net Demand and Time Liability (NDTL) as cash
with the RBI which is known as cash reserve ratio (CRR).
• CRR for banks are prescribed and regulated by RBI.
• Banks are required to maintain CRR prescribed by the RBI on an average daily basis
during a reporting fortnight.
• For the purpose of maintaining CRR, banks maintain a principal account with the Deposit Accounts
Department (DAD) of the Reserve Bank, where the principal office of the bank is located.
• Cash Reserve Ratio ensures that a part of the bank’s deposit is with the Central Bank and is hence,
safe.
• CRR is used by RBI as a monetary policy tool. During high inflation in the economy, RBI may raise the
CRR to lower the bank’s loanable funds.
• 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 supply of money.
• The cash balance that is to be maintained by scheduled banks with the RBI should not be less than 3%
of the total NDTL, which is the Net Demand and Time Liabilities.

CRR SNAPSHOT

Importance of CRR as monetary


What is CRR?
policy tool used by RBI
CRR refers to % of NDTL banks are Control money supply in the market
required to maintain as cash with the RBI

Current CRR is 3% which is one of the Control Inflation


lowest since 1976.

No interest paid on the cash Helps maintain banks solvency


maintained by banks with RBI

CRR is one of the monetary policy tool


used by RBI
CRR Trend

Source: RBI, as on 31st July 2019

• As seen from chart above, current CRR is one of the lowest since 1976 and has been
at 3%.
• Highest CRR has been 15%, which was during July 1989 to October 1995.

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