What is Cash Reserve Ratio?

Cash Reserve Ratio or CRR is the percentage of a bank’s total deposit that the bank has to maintain as liquid cash, as per RBI norms. Banks cannot use this liquid cash for any investing and lending purposes; CRR is calculated as a percentage of the bank’s net demand and time liabilities (NDTL). This Cash Reserve Ratio is stored in the bank’s vault or sent to the RBI. Banks do not earn any interest on CRR.

CRR ensures that a part of the bank’s deposit is with the Central Bank and is thus considered secure.

CRR is directly connected to the base rate of loans and maintaining the control of inflation. The lower the CRR, the more is the rise of the economy.

RBI’s Monetary Policy Committee on the periodic Monetary and Credit Policy decide on the Cash Reserve Ratio in India. RBI can change the Cash Reserve Ratio from time to time at regular intervals to ensure that there is a certain fraction of all the deposits in every bank.