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

What Is CRR?

Cash Reserve Ratio (CRR) is a tool used by the RBI to maintain liquidity and monetary security in the banking sector. CRR is the mandatory portion of a bank’s deposit to be maintained as cash with the RBI and no interest is earned on this.

RBI uses CRR to control liquidity and inflation in the economy. During high inflation, the RBI increases CRR, mandating banks to reserve a fixed amount with the RBI, thereby reducing their lending capacity and controlling the supply of money.

Similarly, during moderate inflation and high-growth phases, the central bank reduces CRR, injecting money into the economy. By lowering the CRR, companies get affordable loans for expansions, which increases investors’ confidence in their future, thereby increasing the stock prices.

How Does CRR Work?

When the RBI increases the CRR, the money available with the bank for lending decreases. Scheduled banks have a minimum 3% of their NDTL (Net Demand Time Liabilities) as CRR with RBI.

When people deposit their money with the bank, it is a liability for the bank. NDTL refers to the deposit made by the general public and the balances held with other banks by the bank. Demand deposits, as the name suggests, are deposits that need to be paid on demand, such as current deposits, demand drafts, balances in matured fixed deposits, and savings bank deposits.

Time liabilities include deposits that cannot be withdrawn on demand and need to be repaid on maturity. These deposits include Fixed Deposits, staff security deposits and the time liabilities portion of a savings account.

How to Calculate CRR?

Here’s how you can calculate CRR,

CRR = Cash Reserve Maintained with RBI / Net Demand and Time Liabilities × 100

This shows the percentage of the Net Demand and Time Liabilities to be reserved with the RBI

Impact of CRR on the Economy

CRR is an important policy tool used by the RBI to regulate the liquidity, inflation levels and the money supply in the economy. During high inflation, the RBI increases the CRR, which reduces the funds available with the banks to lend. This negatively impacts the growth of the economy but helps manage inflation.

When the RBI wants to inject more money into the economy, it lowers the CRR, increasing the loanable funds of the banks. This allows companies and the general public to borrow for investment purposes.

Impact of CRR on Investors

A high CRR creates challenges for companies to fund their growth, which lowers investors’ confidence in the company's prospects. Whereas a low CRR helps companies fund future projects and investments, showing potential for future growth and increasing stock prices.