BharatNotes What is Cash Reserve Ratio (CRR)?
The Cash Reserve Ratio (CRR) is the share of a bank's Net Demand and Time Liabilities (NDTL) that it must keep as a cash balance with the Reserve Bank of India (RBI). It is a direct, quantitative instrument of monetary policy: money locked up as CRR cannot be lent or invested by the bank. CRR is prescribed under Section 42(1) of the Reserve Bank of India Act, 1934, which empowers the RBI to require every scheduled bank to maintain this reserve.
A defining feature is that the RBI pays no interest on CRR balances (since the fortnight beginning 31 March 2007). This makes CRR a relatively blunt but powerful tool — every percentage point of CRR is an interest-free claim on bank deposits.
How CRR Works
When the RBI raises CRR, banks must park more with the central bank, shrinking the funds available for lending — this tightens liquidity and is contractionary (used to fight inflation). When the RBI lowers CRR, funds are released into the system, expanding lending capacity and the money supply.
CRR is computed on NDTL — broadly, a bank's demand deposits (e.g. current accounts) plus time deposits (e.g. fixed deposits), net of inter-bank assets. Banks must maintain a minimum of 90% of the required CRR on a daily basis and 100% on an average basis over the reporting fortnight.
CRR vs SLR
CRR is frequently confused with the Statutory Liquidity Ratio (SLR). The key distinctions:
| Feature | CRR | SLR |
|---|---|---|
| Legal basis | Section 42(1), RBI Act, 1934 | Section 24, Banking Regulation Act, 1949 |
| Held as | Cash with the RBI | Cash, gold, approved securities (held by bank) |
| Interest earned | None | Yes (on the securities held) |
| Primary purpose | Liquidity / money-supply control | Solvency + government-securities holding |
Current Status (2025-26)
At its Monetary Policy Committee meeting on 6 June 2025, the RBI (under Governor Sanjay Malhotra) announced a cut in CRR by 100 basis points, from 4.0% to 3.0% of NDTL, alongside a 50-bps repo rate cut to 5.50% and a shift in stance to "neutral". The CRR reduction is being phased in four equal tranches of 25 bps each, effective from the reporting fortnights beginning 6 September, 4 October, 1 November and 29 November 2025, taking CRR to 3.0% by end-2025. The move is estimated to release roughly ₹2.5 lakh crore of primary liquidity into the banking system (as of the June 2025 MPC).
UPSC Angle
For Prelims, anchor on three facts: the statute (Section 42, RBI Act, 1934), the no-interest rule, and the direction of effect (cut = more liquidity = expansionary). For Mains GS3, frame CRR within the broader liquidity-management and inflation-targeting toolkit, contrasting it with open market operations and the SLR. This is a foundation concept with no single direct PYQ, but it underpins recurring Prelims questions on the RBI's instruments of monetary control and money supply.
