Cash Reserve Ratio (CRR) - Rate, Meaning, What It Is, Formula, & How to Calculate

Why Does CRR Matters in an Economic System?

CRR is a monetary policy tool used by the RBI. It refers to the minimum percentage of a commercial bank’s deposits that must be maintained as reserves with the RBI. The central bank periodically adjusts the CRR to regulate the economy's liquidity. The CRR helps to control inflation, manage credit flow, and ensure financial stability.

What is CRR (Cash Reserve Ratio)?

The Cash Reserve Ratio (CRR) is the proportion of a bank’s Net Demand and Time Liabilities (NDTL) that it is legally required to maintain as cash reserves with the Reserve Bank of India. All the scheduled banks in India licensed by the RBI to carry out banking activities need to maintain a certain cash deposit with the central bank to reduce the risk of over-lending and maintain liquidity.

CRR pays no interest to the depository institutions. Hence, it is a direct tool in the hands of the RBI to maintain liquidity. It is also a regulatory tool that helps in supporting price stability and maintaining depositors' confidence in the banking system.

Objectives & Role of CRR in the Economy

CRR is not just a regulatory tool or a compliance requirement; it plays a critical role in the country's banking and economic system. Let us find out how it plays a crucial role in the economic system of the country:

Control Inflation: By increasing CRR, the RBI withdraws excess liquidity from banks, reducing money supply and curbing inflationary pressures.

Boost Growth: Lowering CRR releases more funds to banks for lending, stimulating credit flow and economic activity.

Maintain Liquidity: Ensures banks keep a portion of their deposits in reserve, safeguarding the banking system against sudden cash demands.

Ensure Financial Stability: Acts as a buffer to support the stability of banks, strengthening depositor confidence.

Support Monetary Policy: Helps RBI manage economic conditions by striking a balance between controlling inflation and encouraging growth through credit management.

CRR and Historical Trends

CRR has been historically used by the RBI as an effective monetary policy tool and to control inflation in the economy. Historically, the CRR has experienced fluctuations; it was raised during periods of high inflation to reduce the money supply and lowered during economic slowdowns to encourage lending and stimulate growth. It is a dynamic tool, and investors need to stay updated about the CRR, as it impacts a bank’s lending capacity and the overall level of economic activity. For traders, it is important to have a close look at the RBI announcements as it can affect the market trends.

Calculation of CRR

CRR is calculated as per the formula devised by the RBI. It is as follows:

CRR (%) = (Cash Reserves with RBI ÷ NDTL) × 100

Here:

Cash Reserves with the RBI refer to the actual cash deposited by a bank with the RBI.

NDTL includes all deposits and other liabilities of the bank that are payable on demand or after a specified period. For example, if a bank’s NDTL is ₹1,000 crore and the CRR is set at 4%, it must maintain a cash reserve of ₹40 crore with the RBI.

FAQs

What is the current CRR rate in India?

The RBI prescribes the current CRR rate, which can be adjusted depending on the needs of monetary policy.

How is CRR different from SLR?

CRR is maintained as cash with the RBI, while SLR is invested in approved securities or kept in liquid assets.

Why does the RBI increase or decrease CRR?

RBI adjusts CRR to control liquidity, increasing it to curb inflation and reducing it to encourage growth.

Does CRR earn any interest for banks?

No, the amount kept as CRR with the RBI does not earn any interest.

How is CRR calculated by banks?

Banks calculate CRR as a fixed percentage of their Net Demand and Time Liabilities (NDTL).