CRR
The Cash Reserve Ratio (CRR) is the mandatory percentage of a commercial bank's net demand and time liabilities (NDTL) that must be maintained as cash deposits with the Reserve Bank of India, used to regulate liquidity in the banking system.
The Cash Reserve Ratio is one of the RBI's most direct tools for controlling the money supply. By requiring banks to lock away a fraction of their deposits as sterile cash at the RBI — earning no interest — the central bank directly limits the funds available for lending. When the RBI raises the CRR, it drains liquidity from the system; when it reduces the CRR, it releases funds into the banking system and expands the potential credit base.
The mechanics work through the money multiplier. If the CRR is 4%, then for every ₹100 in deposits, ₹4 must be parked with the RBI. The remaining ₹96 can be lent out, creating fresh deposits in the recipient's bank, which again face the same 4% obligation, and so on. The theoretical maximum credit creation is 1 ÷ CRR, though in practice the multiplier is lower due to currency leakage, the SLR requirement, and prudent lending standards.
Historically, the CRR in India ranged as high as 15% in the early 1990s when inflation was high and credit growth needed restraint. Over two decades of reforms brought it down significantly; in March 2020, the RBI cut the CRR to 3% — a historic low — to inject liquidity during the pandemic shock, before gradually restoring it to 4% in 2022. Unlike the repo rate, CRR changes are relatively infrequent because they have an immediate and sizeable impact on bank profitability given no interest is earned on CRR balances.
For investors analysing banks, changes in the CRR affect net interest margins. A CRR hike compresses margins because a larger share of deposits earns nothing, while a cut can improve profitability by freeing funds for higher-yielding deployments. In credit-intensive sectors such as real estate, automobiles, and small businesses, CRR cuts can signal easier credit availability and improved loan growth prospects.
It is worth noting that the CRR applies to scheduled commercial banks but not to certain co-operative banks and payment banks in the same manner. Additionally, CRR is calculated on NDTL — which includes demand deposits like current and savings accounts plus fixed-duration liabilities — rather than total assets, so understanding what constitutes NDTL is essential for precise calculations. The CRR requirement is averaged over a fortnight, giving banks flexibility in day-to-day cash management.