Cash Reserve Ratio

cash

The Cash Reserve Ratio is the amount of funds that the banks are bound to keep with Reserve bank of India as a portion of their Net Demand and Time Liabilities (NDTL). The objective of CRR is to ensure the liquidity and solvency of the Banks. The CRR is maintained fortnightly average basis.

Impacts of Reducing CRR

When CRR is reduced, more funds are available to banks for deploying in other businesses because they need to keep fewer amounts with RBI. This means that the banks would have more money to play and this leads to reduction of interest rates on Loans provided by the Banks.

In context with inflation, reduction in CRR leaves more money in the hands of commercial banks and this leads to increase in the money supply in system. When money supply increases, too much money chases too few goods and this leads to rise in inflation.

Impacts of Increasing CRR

When RBI increases the CRR, less funds are available with banks as they have to keep larger protions of their cash in hand with RBI. This means that banks will now have less money to play with. Moreover, Reserve Bank does not pay any interest on the CRR balances.  Since commercial banks  don’t earn any interest, the banks are left with an option than to increase the interest rates. If RBI hikes this rate substantially, banks will have to increase the loan interest rates. The home loans, car loans and EMI of floating Rate loans increase. Thus hike in CRR leads to increase of interest rates on Loans provided by the Banks.

Reduction in CRR sucks money out of the system causing to decrease in money supply. When money supply decreases, the inflation comes down.

Ceiling on CRR

Please note that earlier RBI was empowered to fix RBI between 3-20% by notification. However, from 2006 onwards the RBI is empowered to fix the CRR on its discretion without any ceiling.

Do banks earn interest on CRR?

They used to do once upon a time. From March 31, 2007 onwards, RBI does not pay any interest on the CRR balances maintained by Scheduled Commercial Banks.

Key Policy Rates as on March 2015
Current Bank Rate8.50%
Current Repo Rate7.50%
Current Reverse Repo rate6.50%
Current Marginal Standing Facility Rate8.50%
Current Cash Reserve Ratio4%
Current Statutory Liquidity Ratio21.50%
Last Updated on16.3.2015

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Comments

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    Reply

    Superb presentation skill Sir….

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    Reply

    its so useful and easy to understand.thanks.

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    Reply

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    Reply

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    Reply

    Very Good …..Keep it up….

    ALl this information can be obtained in

    Hand Book of Banking Information

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    Reply

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    Reply

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    Reply

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    Reply

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  • Mathan
    Reply

    Perfect Explanation..Thank you G K Today

  • vivekkk
    Reply

    Sir CRR was explained in such a simplistic manner that menot being from a commerce background also had easily undrstood it in one reading

  • eswari
    Reply

    after read this only i got clear idea about this crr

  • niraj762
    Reply

    Please update the CRR to 4.75% w.e.f Mar 12. There was a cut of 0.75% in CRR in Mar 12.

  • Rahul
    Reply

    CRR pe interest ka kya concept hai?

    • Dravid

      No interest on CRR….This is only a ratio….

  • seema
    Reply

    Interest on CRR means if you are reserving Rs. 100 you will able to use Rs. 91 only

  • Kmasha10
    Reply

    Really great and very use full for aspiring candidates.

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    Reply

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    Reply

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    Reply

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    Reply

    thanks alot gk today group for providing such a g8 material ……………………..

  • MANORANJAN
    Reply

    Kindly change current CRR Ratio 4.25% from 5.5% in the top of the paragraph. Because the current CRR Ratio is 4.25 from 1st Nov 2012

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    Reply

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    Reply

    Thanks a lots to GK Today Team for providing more effective GK supplements.

  • Shanmugapriya
    Reply

    Thanx a lot. Simple and easy to understand.

  • rahul
    Reply

    what is the meaning of drain out the excess liqidity ? why rbi increase crr if it is favorable to customer as well as for banks?

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    Reply

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    Reply

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    Reply

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  • hitesh
    Reply

    sir, could you please tell me that when CRR increase or decrease, means which factors affect it ?

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    Reply

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    Reply

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    Reply

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    Reply

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    Reply

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  • sneha
    Reply

    Thanks for making it so simple to understand

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    Reply

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    Reply

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    Reply

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    Reply

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    Reply

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    Reply

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    Reply

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