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CRR - Cash Reserve Ratio

CRR Meaning

CRR or Cash Reserve Ratio is one of the monetary policy instruments that the RBI uses to control the supply of money in the India Economy. It is one of the many financial tools that enable India’s apex bank to maintain liquidity and control inflation in this country.

Hence, it is ideal to have a clear understanding of CRR and its impact on all the financial dealings and India’s economy, what is CRR in banking, and more.

What is CRR or Cash Reserve Ratio?

CRR or Cash Reserve Ratio is basically the percentage of cash that banks operating in India need to keep with the RBI. Moreover, they need to maintain this reserve in liquid cash. For instance, if the current CRR is 4%, then for every deposit over Rs.100, banks must keep Rs.4 aside for this purpose.

A point to understand here is that, this calculation here may be a straightforward one, but it has larger implications. This ratio helps in regulating the money supply in India’s economy by eliminating liquidity risk. When this ratio increases, the interest rate on loans also increases, and vice versa.

Moreover, financial institutions cannot earn any interest on this and cannot use it for lending or investing purposes.

Now that you have a brief idea regarding CRR meaning refer to the next section to understand its objectives.

Objectives of Cash Reserve Ratio

Here are the purposes CRR fulfils:

  1. Because of CRR, financial institutions ensure that there is an adequate amount of cash available to the consumers so that they do not struggle with a liquidity crisis.
  2. It has a key role in controlling inflation, and when that is high, this cash reserve ratio increases, which prevent financiers from lending more.
  3. It also takes part in controlling the supply of money in the country’s economy. The economy inevitably witnesses growth when the CRR is reduced.

What is the Current CRR Rate?

Falling under essential components of RBI’s monetary policy, CRR rate stands current at 4%. RBI has recently announced the increase of cash reserve ratio, which took place in two phases. In the first phase, it went up to 3.5%, and in the second phase, the CRR was increased to 4%.

How does Cash Reserve Ratio Work?

When the Reserve Bank of India announces that the CRR will increase, the total funds available with the financial institutions will inevitably decrease. It will have an opposite impact when this rate decreases.

Since financiers are responsible for lending funds to the customers, making additional investments, etc., RBI makes sure that the CRR is appropriately maintained.

How is CRR Calculated?

CRR is calculated as a percentage of any financial institution’s Net Demand and Time Liabilities or NDTL. Note that a financial institution’s demand liabilities can include current deposits, cash certificates, demand drafts, etc. Some examples of time liabilities are gold deposits, FDs, etc.

To calculate CRR, this is the formula financiers use:

  • CRR = (Liquid cash/ NDTL)*100

How does CRR Affect the Economy?

Since CRR helps to regulate the money supply, level of inflation, etc., an increase of CRR automatically lowers the funds available for lending. Since it reduces the liquidity in an economy, inflation remains under control.

On the other hand, financiers automatically have adequate funds to lend to customers when RBI lowers this rate. Hence, it reduces the cost of availing of a loan.

Difference Between CRR & SLR

As a borrower, it is essential for you to understand the Cash Reserve Ratio and Statutory Liquidity Ratio clearly. In the case of a CRR, banks need to submit liquid cash with the RBI. Whereas the latter one is basically a percentage of deposits, every financier has to keep as liquid assets. Moreover, these funds can be anything among PSU bonds, gold, Government securities, or any asset mentioned by RBI.

On the other hand, CRR includes only cash reserves, and financial institutions do not get to earn any interest on the reserved funds. In case of SLR, lenders can earn interest, and it involves controlling a financial institution’s control for credit expansion.

Now that you have an insight into CRR, you will understand how it will impact the economy, lending, etc., when you make your financial decisions. You can now apply for a loan with Bajaj Housing Finance Limited and avail the benefits of an attractive interest rate.