Cash Reserve Ratio (CRR)
CRR refers to the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) — essentially total deposits — that must be maintained with the RBI in cash. Banks do not earn interest on these reserves.
Formula
CRR Amount = NDTL x (CRR % / 100)
For example, a bank with NDTL of ₹10,000 crore at 4% CRR must maintain ₹400 crore with the RBI.
Role in Monetary Policy
| RBI Action | CRR Change | Effect |
|---|---|---|
| Tightening | CRR increased | Banks have less money to lend; money supply contracts |
| Easing | CRR decreased | Banks retain more for lending; money supply expands |
CRR is a more blunt instrument compared to repo rate — it directly locks up cash rather than altering borrowing cost.
CRR vs. SLR
| Parameter | CRR | SLR |
|---|---|---|
| Held with | RBI (cash) | Bank itself (eligible assets) |
| Form | Cash only | Cash, gold, or approved securities |
| Interest earned | None | Yes (on government securities) |
| Purpose | Liquidity control | Solvency + government debt market support |
Historical Context
CRR has ranged from 15% in the early 1990s to current levels around 4%. The reduction reflects RBI's shift toward interest rate-based monetary policy as the primary tool, with CRR as a supplementary instrument.
Impact on Bank Profitability
Since no interest is earned on CRR balances, a higher CRR reduces effective funds available for lending, compressing net interest margins.