Cash Reserve Ratio ( CRR )- Meaning, Objectives, Current CRR - RBI Reduced CRR by 100 basis points to 3.00%

The cash reserve ratio (CRR) in India is currently 3.00%, per the latest update by the Reserve Bank of India (RBI). Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash. 

• The Reserve Bank of India (RBI) decreased the cash reserve ratio (CRR) by 100 basis points from 4.00% to 3.00%, in four 25-bps tranches starting September 2025.
• The reduction aimed to increase liquidity in the banking system amid global inflation trends.

Understanding the cash reserve ratio and how it affects liquidity and inflation in India is crucial for financial stability. 

Objectives of Cash Reserve Ratio

The Cash Reserve Ratio serves as one of the reference rates when determining the base rate. The base rate is the minimum lending rate below which a bank is not allowed to lend funds. The Reserve Bank of India (RBI) determines the base rate.

The rate is fixed and ensures transparency regarding borrowing and lending in the credit market. The Base Rate also helps banks reduce their cost of lending so that they can extend affordable loans. 

The cash reserve ratio also extends to its role in curbing inflation and promoting monetary discipline across the banking sector. There are two main objectives of the Cash Reserve Ratio:

• The Cash Reserve Ratio ensures that part of the bank’s deposits are with the Central Bank and are hence secure.
• Another objective of CRR is to keep inflation under control. During high economic inflation, the RBI raises the CRR to reduce the money left with banks to sanction loans. It squeezes the money flow in the economy, reducing investments and bringing down inflation.

Along with CRR, other key tools like the Statutory Liquidity Ratio (SLR) and Repo Rate also play vital roles in managing the money supply.

How does the 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 3.00% 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) held by banks. It includes deposits from the general public and balances held by the bank with other banks. Demand deposits consist of all liabilities that the bank needs to pay on demand, such as current deposits, demand drafts, balances in overdue fixed deposits, and the demand liabilities portion of savings bank deposits.

Time deposits consist of deposits that need to be repaid on maturity and where the depositor can’t withdraw money immediately. Instead, he is required to wait for a certain time period to gain access to the funds. This includes fixed deposits, time liabilities portion of savings bank deposits and staff security deposits.

A bank's liabilities include call money, market borrowings, certificates of deposit, and investments in deposits in other banks. In short, the higher the cash reserve ratio, the less money is available to banks for lending and investing.

NDTL = Demand and time liabilities (deposits) with public sector banks and other banks – deposits with other banks (liabilities)

How does CRR affect the economy?

Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary policy, which regulates the money supply, level of inflation, and liquidity in the country. The higher the CRR, the lower the liquidity with the banks and vice versa. During high levels of inflation, attempts are made to reduce the flow of money in the economy.

For this, the RBI increases the CRR, lowering the loanable funds available to the banks. This, in turn, slows down investment and reduces the supply of money in the economy. As a result, the growth of the economy is negatively impacted. However, this also helps bring down inflation.

On the other hand, when the RBI wants to pump funds into the system, it lowers the CRR, which increases the loanable funds available to the banks. The banks, in turn, sanction a large number of loans to businesses and industry for different investment purposes. This also increases the overall supply of money in the economy, which ultimately boosts the economy's growth rate.

Difference between CRR & SLR

Both CRR and SLR are essential components of the monetary policy. However, there are a few differences between them. The following table gives a glimpse into the dissimilarities:  

Why is the Cash Reserve Ratio changed regularly?

As per the RBI guidelines, every bank is required to maintain a ratio of its total deposits that can also be held with currency chests. This is considered to be the same, as it is kept with the RBI. The RBI can change this ratio from time to time at regular intervals. When this ratio is changed, it impacts the economy.

Banks make profits by lending. To achieve this goal, they may lend out maximum amounts to make higher profits, but they have very little cash with them. An unexpected rush by customers to withdraw their deposits will lead to banks being unable to meet all repayment needs.

Therefore, CRR is vital to ensure that a certain fraction of all deposits in every bank is always kept safe with them. While ensuring liquidity against deposits is the prime function of the CRR, it has an equally important role in controlling the interest rates in the economy.

The RBI controls the short-term volatility in the interest rates by adjusting the amount of liquidity available in the system. Too much cash in the economy leads to the RBI raising interest rates to bring down inflation, while the scarcity of cash leads to the RBI cutting interest rates to stimulate growth in the economy.

Thus, as a depositor, it is good for you to know of the CRR prevailing in the market. It ensures that, regardless of the performance of the bank, a certain percentage of your cash is safe with the RBI.

Current Repo Rate and its impact

Apart from CRR, the RBI uses other metrics to regulate the money supply in the economy. RBI revises the repo rate and the reverse repo rate in accordance with fluctuating macroeconomic conditions. Whenever the RBI modifies the rates, it impacts each sector of the economy, albeit in different ways.

Changes in the repo rates can directly impact big-ticket loans such as home loans. An increase/decrease in the repo rates can result in banks and financial institutions revising their MCLR proportionately. The MCLR (Marginal Cost of Funds Based Lending Rate) is the internal reference rate that helps banks find out the interest they can levy on loans.

A decline in the repo rate can lead to banks reducing their lending rates, which can benefit retail loan borrowers. However, to lower loan EMIs, the lender must reduce its base lending rate. As per the RBI guidelines, banks and financial institutions are required to transfer the benefits of interest rate cuts to consumers as quickly as possible.

Conclusion

Understanding the cash reserve ratio's meaning is key to grasping how monetary policy functions in a developing economy. The cash reserve ratio in India helps the Reserve Bank of India control liquidity, inflation, and ensure banking stability. Whether you're a student, investor, or policymaker, knowing the cash reserve ratio and its role in economic regulation can offer valuable insights into how the Indian financial system responds to fiscal challenges.

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