Cash Reserve Ratio (CRR)

India’s central bank uses several tools to regulate the economy in banking and monetary policy. One crucial tool is the Cash Reserve Ratio (CRR). While it might sound like a complicated term, the CRR plays a pivotal role in shaping the financial landscape. 

This blog will help you understand the Cash Reserve Ratio meaning, why it matters, and how it affects the banking sector and the economy.

What is the Cash Reserve Ratio?

CRR is the minimum percentage of a commercial bank’s total deposit fixed by the central bank that they must keep as reserves either in cash or as deposits with the RBI. The RBI maintains this reserve, acting as a backup to ensure that banks can meet withdrawal demands and remain financially stable. Its full form is Cash Reserve Ratio.

For example, if a bank has total deposits of ₹200 crore and the CRR is fixed at 4%, the bank must keep ₹8 crore with the central bank, leaving the rest of ₹192 crore available for lending to individuals and businesses.

What is the Present Cash Reserve Ratio​?

As of 2025, the present Cash Reserve Ratio (CRR) is 4.00%, which means that for every Rs 1000 worth of deposits, the bank has to maintain Rs 40 with the RBI. The CRR is a crucial part of the RBI’s monetary policy. 

Why is CRR Important?

The cash reserve ratio represents a portion of a commercial bank’s total deposits back in reserve. There are some primary reasons why CRR is important:

1. Liquidity Management

CRR also ensures that banks have minimum funds available to customers, even in high demand. A high CRR rate lets banks to navigate periods of unexpected cash demand smoothly.

2. Economic Stability

Since the CRR regulates the money supply, it stimulates the economy whenever necessary by lowering the Cash Reserve Ratio.

3. Inflation Control

CRR helps control inflation. In an inflationary climate, the RBI can raise the CRR to deter banks from lending more.

Also Read: What is PEG Ratio in Stock Market: Calculation, Formula and FAQs

How Does the Cash Reserve Ratio Work

The money available to the banks is reduced whenever the RBI increases the Cash Reserve Ratio. This is the RBI’s way of handling the extra money flow in the economy. Banks’ cash balance with the RBI should equal 4 percent of the total net demand and time liabilities (NDTL), which is done on a fortnightly basis.

NDTL refers to banks’ total demand and time liabilities (deposits). A bank’s liabilities include certificates of deposit, call money market borrowings, and investments in deposits in other banks. The higher the Cash Reserve Ratio, the less money is available to banks for lending and investing, and vice versa. The formula to calculate NDTL is as follows:

NDTL = Demand and time liabilities (deposits) with public sector banks and other banks – deposits with other banks (liabilities)

How is the Cash Reserve Ratio Calculated?

The formula for calculating CRR is relatively simple. It determines the amount of money a commercial bank must maintain as reserves with the RBI.

Cash Reserve Ratio Formula:

CRR = (Reserve Requirement/ Bank Deposits) * 100

Where:

• The Reserve Requirement is the money the bank must keep as reserves (a certain percentage of the total deposits).
  
• Total Deposits = total amount of deposits the commercial bank holds.
  

Example of CRR Calculation

Let’s say a bank has total deposits of ₹1000 crore, and the central bank sets the CRR at 4%.

• Total Deposits = ₹1000 crore
• CRR = 4%

Applying the formula, we get

CRR = (Reserve Requirement/ Bank Deposits) * 100

4% = (Reserve Requirement/ 1000 Crore ) * 100

Reserve Requirement = (1000 Crore * 4) / 100 = ₹40 Crore

So, the bank must maintain ₹40 crore as reserves with the central bank.

CRR vs SLR: Key Differences

The SLR and CRR are important components of the monetary policy. However, there are some differences between them. Let’s understand this with the help of the table below:  

How Does CRR Affect The Indian Economy?

The Cash Reserve Ratio (CRR) is a major part of the RBI’s monetary policy, which regulates inflation levels, money supply, and liquidity in India. The lower the CRR, the higher the liquidity with the banks and vice versa. During high inflation levels, attempts are made to lower the money flow in the economy. 

For this, the RBI increases the CRR, reducing the loanable funds available with the banks. This, therefore, slows down investment and lessens the money supply in the economy. As a result, the economy’s growth is negatively impacted. However, this also helps bring down inflation.

In contrast, when the RBI wants to boost funds in the system, it lowers the CRR, increasing loanable funds with the banks. The banks consequently approve many loans to businesses and industries for different investment goals. This also increases the overall money supply in the economy, eventually boosting its growth rate.

Conclusion

Usually, the central bank uses the CRR as a monetary policy tool to influence the country’s interest and borrowing rates. Not only does the concept help encourage the economy, but it also ensures that banks have sufficient liquidity to meet customer needs even under high-withdrawal scenarios. Understanding the CRR concept also helps you make informed decisions about the right financial product. Thus, not only is CRR an essential part of monetary policies, but it is also an emergency backup for customers.