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Cash Reserve Ratio (CRR): Meaning, Objectives and Calculation

27 Jul, 2025

3 mins read

The Reserve Bank of India (RBI) uses the Cash Reserve Ratio as a key monetary policy tool to regulate liquidity, control inflation, and ensure financial stability in the banking system. By requiring banks to maintain a fixed portion of their deposits with the RBI, CRR directly influences how much money banks can lend thereby shaping the flow of credit in the economy.

What is the Cash Reserve Ratio?

The Cash Reserve Ratio (CRR) is the minimum percentage of a commercial bank’s total deposits that it must keep in the form of cash reserves with the Reserve Bank of India (RBI). This means banks are required to hold a certain portion of their deposit liabilities as cash, which they cannot use for lending or investment purposes.

The CRR is a tool used by the RBI to control liquidity in the banking system. By increasing the CRR, the RBI can reduce the amount of money available for banks to lend, thereby tightening the money supply. Conversely, reducing the CRR increases liquidity in the system.

How CRR Works

Here is how CRR works in practice:

RBI sets the CRR rate
Banks calculate their NDTL
They must hold that percentage in cash with RBI
RBI reviews compliance fortnightly

Managing CRR helps RBI regulate the money supply. Raising CRR tightens liquidity and curbs inflation. Lowering it frees up funds for lending and economic growth.

Objectives of CRR

Here are the key objectives of CRR:

Liquidity control: Ensures banks hold enough liquid cash
Inflation management: Reduces excess money in the system
Safety net: Helps banks handle large withdrawals
Monetary discipline: Prevents over-lending by banks

Cash Reserve Ratio Formula and Calculation

Use this cash reserve ratio formula:

CRR = (Cash Reserve / NDTL) × 100

CRR calculation example:

If a bank’s NDTL is ₹50,000 crore and CRR is set at 4%, it must hold ₹2,000 crore with the RBI.

CRR vs SLR: Key Differences

While both are regulatory tools, CRR and SLR differences paint a different picture.

Feature	CRR (Cash Reserve Ratio)	SLR (Statutory Liquidity Ratio)
Full Form	Cash Reserve Ratio	Statutory Liquidity Ratio
Requirement	Kept with RBI in cash	Held in gold, cash or approved securities
Objective	Regulate money supply	Ensure bank solvency
Interest	No interest paid by RBI	Banks earn interest
Impact on Lending Capacity	Directly reduces cash for loans	Reduces lending depending on holdings

Conclusion

The cash reserve ratio is a vital tool in India’s monetary policy. It ensures banks maintain stability and manage liquidity. It also helps the RBI control inflation and influence economic activity. For banks, it limits lending capacity but improves risk management. For observers, any change in CRR provides a clue about the central bank’s policy direction.