The Cash Reserve Ratio (CRR) is the proportion of a commercial bank's Net Demand and Time Liabilities (NDTL) that it must hold as cash reserves with the Reserve Bank of India (RBI). CRR balances earn no interest — making it a pure liquidity-absorption tool.
Formula: CRR (in Rs) = NDTL x CRR rate
Example: A bank with Rs 10 lakh crore of NDTL and a 4.5% CRR must maintain Rs 45,000 crore as a non-interest-bearing balance with RBI. The opportunity cost (at, say, a 7% deployable yield) = roughly Rs 3,150 crore per year of forgone interest.
How RBI uses CRR:
- Raising CRR drains liquidity from the system, reduces banks' lending capacity, and is contractionary. Used historically during high-inflation phases.
- Cutting CRR releases liquidity, boosts banks' lending capacity. The Covid period saw the CRR temporarily reduced to 3%.
Distinct from SLR:
- CRR is held as cash with RBI; earns no interest.
- SLR is held as gold, cash, or approved government securities by the bank itself; SLR-held securities earn the bond coupon.
Compliance: Banks must maintain a daily-average CRR over a fortnightly reporting cycle; intra-day shortfalls are tolerated within limits but the average must be met or penal interest is charged.
Significance for investors: CRR cuts are usually a powerful liquidity signal because the released funds are pure cash, immediately deployable. Stocks of banks (especially PSUs) and rate-sensitive sectors often rally on a CRR cut announcement.
Related: SLR, Repo Rate, Reverse Repo Rate.
Disclaimer: Educational content from MintByte (ARN-314872, MFD). CRR is reviewed by the RBI periodically — check current rate at rbi.org.in. SEBI Investment Adviser registration is in process.