November 11, 2025
6 mins read
It is required by law that all commercial banks in India keep a certain percentage of their total deposits in cash. The Reserve Bank of India (RBI) gave this order, and the Cash Reserve Ratio (CRR) is the name of this specific percentage.
According to RBI rules, banks can't use this money that is set aside for lending or investing. Because of this, commercial banks don't earn any interest on the money they keep with the RBI as their CRR.
The RBI's monetary policy relies heavily on the Cash Reserve Ratio. It sets a low percentage of a bank's total deposits that must be kept as cash with the central bank.
Think of it as a way to stay safe. This rule makes sure that banks always have enough cash on hand to handle large and unexpected withdrawals from customers. It helps keep the banking system stable and reliable.
The CRR is one of the RBI's important tools for controlling the amount of money, or liquidity, in the economy. The RBI can raise the Cash Reserve Ratio if it sees too much money moving around, which could cause inflation to rise.
This makes banks keep more cash on hand, which means they can't lend as much. This makes the amount of money available less. On the other hand, the RBI can lower the CRR to get the economy going again. This lets banks lend more freely, which puts more money into the system and could help the economy grow.
The Cash Reserve Ratio plays a number of important roles in the economy. The main things it does are listed below:
Controls Liquidity: The Cash Reserve Ratio is a direct way to control how much cash is in the economy. The RBI can change the levels of liquidity to keep them in check.
The Cash Reserve Ratio helps keep inflation in check by changing how much money is in circulation. A higher Cash Reserve Ratio can bring in more money from the economy, which can help keep prices from going up.
Make sure the bank is still open: It acts as a safety net to make sure that banks have enough cash on hand. This keeps them from running out of money too quickly and protects the interests of people who put money in the bank.
You can figure out the Cash Reserve Ratio by taking a certain percentage of a bank's Net Demand and Time Liabilities (NDTL). It's not hard to understand NDTL. It is made up of two main parts:
Demand Liabilities: These are funds that customers can take out without giving notice ahead of time. This includes the money in checking and savings accounts.
Time Liabilities: These are deposits that are held for a set amount of time and can't be taken out until the end of that time. Fixed deposits (FDs) and recurring deposits (RDs) are two common types.
You can find the NDTL by adding up all of a bank's demand and time liabilities. Some debts, like deposits held with other banks, are taken out of this total amount. After that, the current CRR percentage is applied to this final NDTL amount.
You might be wondering why this rule is in place. The main goal of the CRR is to keep the banking system safe and stable. It protects you, the depositor, in this way.
The system makes sure that banks don't lend out all of their money by making them keep some of it with the RBI. This extra cash acts as a safety net. It's there to handle any sudden, large number of withdrawals that customers need to make.
Imagine a time when a lot of people who have money in the bank want it back at the same time. A bank could run out of cash without this reserve. The CRR helps stop things like this from happening.
This mechanism makes people more confident in the banking system. It makes people feel safe about their money. It is also a very important tool for the RBI to carry out its monetary policy and run the economy of the country.
Additional Read: What is Quantitative Easing?
The RBI is very serious about keeping the CRR up to date. If a bank doesn't keep the right amount of CRR on any given day, it will be fined. This isn't just a fine; it's a charge for the shortfall.
The RBI says that the penalty is in the form of penal interest. According to the recent rules, banks must pay interest on the amount that is less than the required daily balance.
This penalty interest is 3% higher than the bank rate. If the default goes on for another day, the penalty interest rate goes up to 5% above the bank rate. These punishments make sure that all banks follow the rules.
The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) are both important monetary policy tools. However, they have key differences.
Criteria | Cash Reserve Ratio (CRR) | Statutory Liquidity Ratio (SLR) |
Meaning | The portion of deposits that banks must keep as cash with the RBI. | The portion of deposits that banks must maintain as liquid assets with themselves. |
Objective | To control liquidity in the economy and ensure bank solvency. | To ensure banks can meet short-term obligations and control bank credit. |
Interest Income | Banks earn no interest on the funds maintained as CRR. | Banks can earn interest on the assets maintained as SLR, such as government securities. |
Where funds are parked | Funds are parked with the Reserve Bank of India (RBI). | Assets are kept with the bank itself in the form of cash, gold, or government securities. |
To steer the economy, the RBI changes the CRR a lot. It's a step taken ahead of time to make sure things stay stable. For example, if banks lend too much money, it could cause inflation to rise and make the financial system less stable.
The RBI can cool things down by raising the CRR. This means that banks have less money to lend, which helps keep the money supply in check. This keeps the economy from getting too hot.
On the other hand, when the economy is slowing down, lowering the CRR encourages lending and increases economic activity. These small changes that happen all the time help the RBI keep a good balance between encouraging growth and keeping prices stable.
Anyone who works in the financial markets should know what the CRR is. This one ratio can have an effect on the whole economy. When the CRR changes, it affects how much money banks can lend. This, in turn, affects interest rates and the growth of businesses.
When the economy grows more slowly, it can hurt business profits and, as a result, stock prices. So, paying attention to the RBI's CRR announcements can help you get a better idea of the bigger economic trends that could have an impact on your investments.
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The percentage of deposits that commercial banks need to maintain as liquid cash with the Reserve Bank of India (RBI) is called the cash reserve ratio or CRR. It is important to maintain a certain level of liquidity, money supply, and inflation in the economy.
When the RBI increases the CRR, it requires banks to maintain a higher percentage of their deposits as liquid cash, thereby reducing the amount of deposits they can lend. As banks can lend less, it reduces money supply and inflation and may even increase interest rates.
The RBI can revise the cash reserve ratio once every two weeks if the situation demands so.
If a bank is not able to maintain the required CRR, the RBI can either impose a fine on it or reduce its lending capacity.
A decrease in CRR means banks have to maintain a lesser amount of liquid cash with the RBI, which increases their lending capacity, and vice versa.
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