Cash Reserve Ratio ( CRR )

Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the Reserve
Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash.

As of February 7, 2025, the current Cash Reserve Ratio (CRR) in India is 4.00%, as
decided by the Reserve Bank of India (RBI).

Objectives of Cash Reserve Ratio

The Cash Reserve Ratio serves as one of the reference rates when determining the base rate.
Base rate means the minimum lending rate below which a bank is not allowed to lend funds. The
base rate is determined by the Reserve Bank of India (RBI).

The rate is fixed and ensures transparency with respect to borrowing and lending in the credit
market. The Base Rate also helps the banks to cut down on their cost of lending to be able to
extend affordable loans. Apart from this, there are two main objectives of the Cash Reserve
Ratio:

1. Cash Reserve Ratio ensures that a part of the bank’s deposit is with the Central Bank and
is hence, secure.
2. Another objective of CRR is to keep inflation under control. During high inflation in the
economy, RBI raises the CRR to reduce the amount of money left with banks to sanction
loans. It squeezes the money flow in the economy, reducing investments and bringing
down inflation.

Working of Cash Reserve Ratio

When the RBI decides to increase the Cash Reserve Ratio, the amount of money that is available
with the banks reduces. This is the RBI’s way of controlling the excess flow of money in the
economy. The cash balance that is to be maintained by scheduled banks with the RBI should not
be less than 4% of the total NDTL, which is the Net Demand and Time Liabilities. This is done
on a fortnightly basis.

NDTL refers to the total demand and time liabilities (deposits) that are held by the banks. It
includes deposits of the general public and the balances held by the bank with other banks.
Demand deposits consist of all liabilities which the bank needs to pay on demand like current
deposits, demand drafts, balances in overdue fixed deposits and demand liabilities portion of
savings bank deposits.

Time deposits consist of deposits that need to be repaid on maturity and where the depositor
can’t withdraw money immediately. Instead, he is required to wait for a certain time period to
gain access to the funds. This includes fixed deposits, time liabilities portion of savings bank
deposits and staff security deposits.
The liabilities of a bank include call money market borrowings, certificates of deposit and
investment in deposits in other banks. In short, the higher the Cash Reserve Ratio, the lesser
is the amount of money available to banks for lending and investing.

NDTL = Demand and time liabilities (deposits) with public sector banks and other banks –
deposits with other banks (liabilities)

Effect of CRR on the economy

Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary policy, which
is used to regulate the money supply, level of inflation and liquidity in the country. The higher
the CRR, the lower is the liquidity with the banks and vice-versa. During high levels of inflation,
attempts are made to reduce the flow of money in the economy.

For this, RBI increases the CRR, lowering the loanable funds available with the banks. This, in
turn, slows down investment and reduces the supply of money in the economy. As a result, the
growth of the economy is negatively impacted. However, this also helps bring down inflation.

On the other hand, when the RBI wants to pump funds into the system, it lowers the CRR, which
increases the loanable funds with the banks. The banks in turn sanction a large number of loans
to businesses and industry for different investment purposes. It also increases the overall supply
of money in the economy. This ultimately boosts the growth rate of the economy.

Why is Cash Reserve Ratio changed regularly?

As per the RBI guidelines, every bank is required to maintain a ratio of their total deposits that
can also be held with currency chests. This is considered to be the same as it is kept with the
RBI. The RBI can change this ratio from time to time at regular intervals. When this ratio is
changed, it impacts the economy.

For banks, profits are made by lending. In pursuit of this goal, banks may lend out maximum
amounts, to make higher profits and have very little cash with them. An unexpected rush by
customers to withdraw their deposits will lead to banks being unable to meet all the repayment
needs.

Therefore, CRR is vital to ensure that there is always a certain fraction of all the deposits in
every bank, kept safe with them. While ensuring liquidity against deposits is the prime function
of the CRR, it has an equally important role in controlling the interest rates in the economy.

The RBI controls the short-term volatility in the interest rates by adjusting the amount of
liquidity available in the system. Too much cash in the economy leads to the RBI raising interest
rates to bring down inflation, while the scarcity of cash leads to the RBI cutting interest rates, to
stimulate growth in the economy.
Thus, as a depositor, it is good for you to know of the CRR prevailing in the market. It ensures
that regardless of the performance of the bank, a certain percentage of your cash is safe with the
RBI.

SLR (Statutory Liquidity Ratio)

Statutory Liquidity Ratio popularly called SLR is the minimum percentage of deposits that the
commercial bank maintains through gold, cash and other securities. However, these deposits are
maintained by the banks themselves and not with the RBI or Reserve Bank of India.

Current SLR in India – 18.00%

Working of Statutory Liquidity Ratio

Every bank must have a particular portion of their Net Demand and Time Liabilities (NDTL) in the form
of cash, gold, or other liquid assets by the end of the day. The ratio of these liquid assets to the demand
and time liabilities is called the Statutory Liquidity Ratio (SLR). The Reserve Bank of India (RBI) has the
authority to increase this ratio by up to 40%.

An increase in the ratio constricts the ability of the bank to inject money into the economy. RBI is also
responsible for regulating the flow of money and stability of prices to run the Indian economy. Statutory
Liquidity Ratio is one of its many monetary policies for the same. SLR (among other tools) is
instrumental in ensuring the solvency of the banks and cash flow in the economy.

Components of Statutory Liquidity Ratio

Section 24 and Section 56 of the Banking Regulation Act 1949 mandates all scheduled commercial
banks, local area banks, Primary (Urban) co-operative banks (UCBs), state co-operative banks and central
co-operative banks in India to maintain the SLR. It becomes pertinent to know in detail about the
components of the SLR, as mentioned below.

1. Liquid Assets - These are assets one can easily convert into cash – gold, treasury bills, govt-
approved securities, government bonds, and cash reserves. It also consists of securities, eligible
under Market Stabilization Schemes and those under the Market Borrowing Programmes.

2. Net Demand and Time Liabilities (NDTL) - NDTL refers to the total demand and time
liabilities (deposits) of the public that are held by the banks with other banks. Demand deposits
consist of all liabilities, which the bank needs to pay on demand. They include current deposits,
demand drafts, balances in overdue fixed deposits, and demand liabilities portion of savings bank
deposits.

Time deposits consist of deposits that will be repaid on maturity, where the depositor will not be able to
withdraw his/her deposits immediately. Instead, he/she will have to wait until the lock-in tenure is over to
access the funds. Fixed deposits, time liabilities portion of savings bank deposits, and staff security
deposits are some examples. The liabilities of a bank include call money market borrowings, certificate of
deposits, and investment deposits in other banks.

SLR Limit

SLR has an upper limit of 40% and lower limit of 0%.

Objectives of Statutory Liquidity Ratio

1. To curtail the commercial banks from over liquidating:

A bank or a financial institution can experience over-liquidation in the absence of SLR when the Cash
Reserve Ratio goes up, and the bank is in dire need of funds. RBI employs SLR regulation to have control
over the bank credit. SLR ensures that there is solvency in commercial banks and assures that banks
invest in government securities.

2. To increase or decrease the flow of bank credit:

The Reserve Bank of India raises SLR to control the bank credit during the time of inflation. Similarly, it
reduces SLR during the time of recession to increase bank credit.

Difference between SLR & CRR

Both SLR and CRR are the components of monetary policy. However, there are a few differences
between them. The following table gives a glimpse into the dissimilarities:

Statutory Liquidity Ratio (SLR) Cash Reserve Ratio (CRR)

In the case of SLR, banks are asked to have reserves of The CRR requires banks to have only cash reserves with the
liquid assets which include both cash and gold. RBI

Banks earn returns on money parked as SLR Banks don’t earn returns on money parked as CRR

SLR is used to control the bank’s leverage for credit The Central Bank controls the liquidity in the Banking system
expansion. with CRR

In the case of SLR, the securities are kept with the

In CRR, the cash reserve is maintained by the banks with the
banks themselves, which they need to maintain in the
Reserve Bank of India.
form of liquid assets

Impact of SLR on the Investor

The Statutory Liquidity Ratio acts as one of the reference rates when RBI has to determine the base rate.
The base rate can be considered as the minimum lending rate. No bank can lend anybody below this rate.
This rate is fixed to ensure transparency concerning borrowing and lending in the credit market.

The Base Rate also helps the banks to cut down on their cost of lending to be able to extend affordable
loans. When RBI imposes a reserve requirement, it ensures that a particular portion of the deposits are
safe and are always available for customers to redeem. However, this condition also restricts the bank’s
lending capacity. To keep the demand in control, the bank will have to increase its lending rates.

What happens if SLR is not maintained ?

In India, every bank such as a scheduled commercial bank, state cooperative bank, cooperative central
banks, and primary cooperative banks – is required to maintain the SLR as per the RBI guidelines. For
computation and maintenance of SLR, banks have to report their latest net demand and time liabilities to
RBI every fortnight (Friday). If any commercial bank fails to maintain the SLR, RBI will levy a 3%
penalty annually over the bank rate. Defaulting on the next working day too will lead to a 5% fine. This
will ensure that commercial banks do not fail to have ready cash available when customers demand them.

Repo rate
The Repo Rate—short for Repurchase Agreement Rate—is the interest rate at which the Reserve
Bank of India (RBI) lends money to commercial banks in exchange for government securities. It
is essentially a short-term loan that helps banks maintain liquidity, particularly during times of
financial stress.

When banks need to borrow money from the RBI, they use government bonds as collateral. The
RBI provides the funds with the agreement that the banks will repurchase these securities at a
predetermined price. This arrangement is called a Repurchase Agreement.

The repo rate is a critical tool used by the RBI to manage inflation. If inflation is high, the RBI
increases the repo rate, making borrowing more expensive for banks. As a result, banks pass on
this cost to customers by raising interest rates on loans. This discouraging borrowing reduces the
money supply in the market and helps control inflation.

Reverse Repo rate

The Reverse Repo Rate is what the RBI uses to borrow money from commercial banks. That is
essentially the opposite of the repo rate.

When commercial banks have surplus funds, they can park the money with the RBI in exchange
for interest. The reverse repo rate is the interest that the RBI pays to commercial banks for these
deposits. This procedure aids the RBI in removing surplus market liquidity.
In times of high inflation, the RBI may increase the reverse repo rate to encourage banks to
deposit more money with the central bank. By doing so, the money supply in the economy is
reduced, helping to control inflation.
As of February 7, 2025, the current repo rate is 6.25% and the reverse repo rate is 3.35%.

Repo Rate and its impact

Apart from CRR, there are other metrics used by RBI to regulate the money supply in the
economy. RBI revises the repo rate and the reverse repo rate in accordance with the fluctuating
macroeconomic conditions. Whenever RBI modifies the rates, it impacts each sector of the
economy; albeit in different ways.

Similarly, apart from SLR, repo rate and reverse repo rate are other metrics that the RBI uses for
economic regulation. Whenever RBI modifies the rates, it impacts every sector of the economy, albeit in
different ways. Some segments gain as a result of the rate hike, while others may suffer losses. In some
instances, there can be a considerable impact on big loans like home loans due to a change in reverse repo
rates.

Changes in the repo rates can directly impact big-ticket loans such as home loans. An
increase/decrease in the repo rates can result in banks and financial institutions revising their
MCLR proportionately. The MCLR (Marginal Cost of Funds Based Lending Rate) is the internal
reference rate that helps banks find out the interest they can levy on loans.

A decline in the repo rate can lead to the banks bringing down their lending rate. This can prove
to be beneficial for retail loan borrowers. However, to bring down the loan EMIs, the lender has
to reduce its base lending rate. As per the RBI guidelines, banks/financial institutions are
required to transfer the benefit of interest rate cuts to consumers as fast as possible.

If the RBI cuts the repo rate, it need not necessarily mean that the home loan EMIs would get lesser. Even
the interest rates may not go down. The lending bank also needs to reduce its ‘Base Lending’ rate for the
EMIs to decrease