Cash Reserve Ratio

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.
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54 Comments

  1. Abhishek Verma

    July 9, 2011 at 11:04 am

    Superb presentation skill Sir….

  2. ipsita

    August 22, 2011 at 12:05 pm

    its so useful and easy to understand.thanks.

  3. akhilesh

    September 4, 2011 at 8:05 pm

    its really a very nice but there is a problem when download pdf there is not showing the chart……..

  4. rohit salotra

    September 27, 2011 at 12:40 pm

    sir, its really helpfull for me being posted on very remote area nd hardly getting any magazine, thanks a lot sir, god blesss

  5. ramu

    October 10, 2011 at 10:53 pm

    Very Good …..Keep it up….

    ALl this information can be obtained in

    Hand Book of Banking Information

  6. ramu

    October 10, 2011 at 10:56 pm

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  7. satyajit

    December 31, 2011 at 9:31 am

    easy to understand

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    January 16, 2012 at 5:39 pm

    easy to understand

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    January 19, 2012 at 1:34 pm

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    January 21, 2012 at 3:40 pm

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  11. Mathan

    February 26, 2012 at 7:22 pm

    Perfect Explanation..Thank you G K Today

  12. vivekkk

    March 3, 2012 at 12:16 pm

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

  13. eswari

    March 28, 2012 at 3:41 pm

    after read this only i got clear idea about this crr

  14. niraj762

    April 1, 2012 at 7:07 am

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

  15. Rahul

    April 1, 2012 at 6:53 pm

    CRR pe interest ka kya concept hai?

    • Dravid

      May 21, 2014 at 9:33 pm

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

  16. seema

    May 15, 2012 at 7:34 pm

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

  17. Kmasha10

    May 22, 2012 at 11:24 am

    Really great and very use full for aspiring candidates.

  18. amol

    July 23, 2012 at 2:38 pm

    sir suggest any books as more concepts of banking and include all information of banking….please.

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    August 15, 2012 at 11:27 am

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    August 20, 2012 at 9:52 am

    thanks gk today for providing such a great service for youths and helping in shaping carerr by regular guide and ofcourse best site for enriching gk.

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    October 24, 2012 at 11:31 pm

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

  22. MANORANJAN

    November 8, 2012 at 4:55 pm

    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

  23. Tuya

    January 26, 2013 at 3:39 pm

    Sir …superb…mindblowing…U r great…U r backbone of many banking aspirants…….

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    February 4, 2013 at 7:29 pm

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

  25. Shanmugapriya

    February 8, 2013 at 11:26 am

    Thanx a lot. Simple and easy to understand.

  26. rahul

    February 8, 2013 at 7:13 pm

    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?

  27. goudgyellaiah

    March 19, 2013 at 6:34 pm

    THIS IS VERY VERY HELPFUL TO BANKING INTERVIEWERS

  28. ravikumar

    April 17, 2013 at 4:31 pm

    usefulllllllllllll infrmation thnk u s much

  29. sharma gsn on 21st jun,2013

    June 21, 2013 at 2:57 pm

    It is very useful for the bank staff as well as the one who wants to go for bank jobs. Thanq very much.

  30. Mythili

    August 22, 2013 at 5:04 pm

    THank u so much sir… very useful and informative… keep going ang keep teaching sir… thnk u again sir…

  31. sammy

    February 17, 2014 at 11:16 am

    sir plz suggest me a good book for english practice.i am preparing for bank po..and very bad in english…..plz sir help me

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    March 7, 2014 at 7:13 pm

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  33. hitesh

    May 25, 2014 at 11:15 pm

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

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    June 2, 2014 at 2:51 pm

    it so easy and useful knowledge provided
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    July 29, 2014 at 11:43 am

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    August 26, 2014 at 9:00 am

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    August 27, 2014 at 11:22 am

    really very useful thanks

  38. Nitish Bhardwaj

    September 2, 2014 at 7:37 am

    Thanx sir….really nice & helpful

  39. sneha

    September 5, 2014 at 1:24 pm

    Thanks for making it so simple to understand

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    October 6, 2014 at 3:34 pm

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    October 6, 2014 at 10:02 pm

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    October 7, 2014 at 1:13 pm

    Superbly explained

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    November 11, 2014 at 2:12 pm

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    November 17, 2014 at 5:42 pm

    Superb collection !!!!!!!

  45. sreedhar

    November 20, 2014 at 10:24 pm

    thnks to admini………..

  46. SANJEEV KUMAR

    November 24, 2014 at 5:49 pm

    It is easy to understand

  47. eshwara pandiyan

    January 2, 2015 at 12:47 pm

    great work………. keep it up…….
    and thanks a lot……….cheers………

  48. Avinash

    January 3, 2015 at 8:38 am

    Many thanks.. good explanation

  49. shiv mahima ojha

    March 2, 2015 at 10:32 pm

    Its really nice…….& helpful

  50. PIYUSH

    January 19, 2018 at 7:20 pm

    THERE MUST BE CORRECTION IN THE FOLLOWINF LINE, INSTEAD OF REDUCTION IT SHOULD BE INCREASE IN CRR
    “Reduction in CRR sucks money out of the system causing to decrease in money supply. When money supply decreases, the inflation comes down.”

  51. J.Nisha

    February 5, 2018 at 12:31 pm

    It’s Use full

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