cash reserve ratio

The Cash Reserve Ratio (CRR) is a quantitative monetary-policy instrument under which every scheduled commercial bank in India must maintain a prescribed fraction of its Net Demand and Time Liabilities (NDTL) as a cash balance with the Reserve Bank of India. Its statutory basis lies in Section 42(1) of the Reserve Bank of India Act, 1934, which empowers the RBI to require such reserves. Until the Reserve Bank of India (Amendment) Act, 2006, the statute prescribed a floor of 3% and a ceiling of 20%; the 2006 amendment removed both the statutory floor and ceiling, giving the RBI full discretion to fix CRR as warranted by monetary conditions. Crucially, the RBI pays no interest on CRR balances, so a higher CRR imposes a direct cost on banks and squeezes their lendable resources.

Operationally, CRR is computed on the NDTL reported on the last Friday of the second preceding fortnight and must be maintained on a fortnightly average basis, though banks must hold a minimum of 90% of the required reserve on each day of the fortnight. CRR functions as a blunt but powerful tool for managing liquidity and the money supply: raising CRR absorbs liquidity from the banking system, contracting credit and curbing inflation, while lowering it releases liquidity to stimulate lending. Because reserves are sterile and unremunerated, CRR also influences the banking system's money multiplier, the inverse relationship between the reserve ratio and the volume of deposit creation. It is distinct from the Statutory Liquidity Ratio (SLR) under Section 24 of the Banking Regulation Act, 1949, which may be held in cash, gold or approved securities and is partly remunerative.

In practice the RBI has used CRR alongside the policy repo rate and Open Market Operations as part of the framework recommended by the Urjit Patel Committee (2014) and the subsequent Monetary Policy Committee (MPC) regime created by the RBI (Amendment) Act, 2016. During the COVID-19 shock the RBI cut CRR to 3% in March 2020 to inject liquidity, restoring it to 4% in phases by May 2021. In a notable easing move, the RBI in its June 2025 policy announced a phased reduction of CRR by 100 basis points to 3%, staggered across tranches to release durable primary liquidity into the system, underscoring its continuing relevance even in an interest-rate-targeting framework.

For the UPSC Civil Services Examination, CRR is a high-yield topic in General Studies Paper III (Indian Economy) and recurs in Prelims objective questions. Candidates are typically tested on the distinction between CRR and SLR, the statutory provisions (Section 42 of the RBI Act for CRR versus Section 24 of the Banking Regulation Act for SLR), whether interest is paid (it is not for CRR), and the directional effect of CRR changes on liquidity, credit and inflation. A common exam trap asks whether CRR can be held in securities — it cannot, as it must be a cash balance with the RBI. Aspirants should also connect CRR to the money multiplier and to the broader quantitative-versus-qualitative tools classification of monetary policy.