CASH RESERVE RATIO

Cash Reserve Ratio (CRR)

Cash Reserve Ratio (CRR) refers to the fraction of the total net demand and time liabilities (NDTL) of a scheduled commercial bank in India which it should maintain as cash deposit with the Reserve Bank. The RBI may set the ratio in keeping with the broad objective of maintaining monetary stability in the economy. This requirement applies uniformly to all scheduled banks in the country irrespective of its size or financial position. Non Bank Financial Institution (NBFIs) are outside the purview of this reserve requirement.

The Reserve Bank does not pay any interest on the CRR balances maintained by the scheduled commercial banks (SCBs) with effect from the fortnight beginning March 31, 2007; however, failure of a bank to meet its required reserve requirements would attract penalty in the form of penal interest charged by the RBI.

CRR has, in recent years, assumed significance as one of the important quantitative tools aiding in liquidity management. Higher the CRR with the RBI, lower will be the liquidity in the system and vice versa. During slowdown in the economy, the RBI reduces the CRR in order to enable the banks to expand credit and increases the supply of money available in the economy. In order to contain credit expansion during periods of high inflation, the RBI increases the CRR. The cash reserve ratio as on 8th July, 2017 was 4.0 per cent.

Present CRR = 4%