Cash Reserve Ratio

Also called: CRR, Cash reserve, Minimum cash balance, Required reserve ratio · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 10, Ch 3 "Money and Credit"; Class 12, Ch 3 "Money and Banking"

Meaning

Cash Reserve Ratio (CRR) is the share of a bank's Net Demand and Time Liabilities (NDTL) (mainly its deposits) that the bank must keep as a cash balance with the Reserve Bank of India (RBI). This money earns no interest, and the bank must keep it as an average daily balance [4].

• Formula: Required CRR balance = CRR (%) × NDTL
• Simple money multiplier (ignoring SLR and cash held by the public) = 1 / CRR

CRR matters because it decides how much of each deposit a bank cannot lend. When the RBI raises the CRR, banks have less to lend and total credit in the economy shrinks. When it cuts the CRR, banks get more money to lend.

Explanation

How CRR works

• The base is NDTL, not total deposits.
• Demand liabilities are money the bank must pay whenever the customer asks, e.g. savings and current account deposits.
• Time liabilities are money the bank pays only after a fixed period, e.g. fixed deposits.

• NDTL = (Demand liabilities + Time liabilities) − assets held with other banks (interbank assets).

• Where the money sits: in the bank's account with the RBI, not in the bank's own vault.

• No interest is paid on it. For a bank this is money that brings in no income, so a higher CRR also raises the bank's cost of doing business.
• Average daily balance [4]: the bank does not need the exact amount every single day. The average over the reporting period (a fortnight, i.e. two weeks) must meet the requirement.

CRR and credit creation (the money multiplier)

• How banks create credit:
• A bank gets a deposit and keeps a part as reserves.
• It lends the rest, and that loan comes back into the banking system as a new deposit.

• The cycle repeats, so one rupee of reserves supports many rupees of deposits.

• The money multiplier (how many rupees of deposits one rupee of reserves can support) = 1 / CRR.

• CRR 4% → multiplier = 1 / 0.04 = 25

• CRR 3% → multiplier = 1 / 0.03 ≈ 33.3

• Result: with fresh reserves of ₹100, deposits can grow to:

• about ₹2,500 at 4% CRR
• about ₹3,333 at 3% CRR

Worked example (₹ crore)

• Demand liabilities 600 + time liabilities 400 = 1,000
• Minus interbank assets of 50 → NDTL = 950
• CRR at 3% → 950 × 0.03 = ₹28.5 crore kept with the RBI, earning nothing.
• If the SLR (Statutory Liquidity Ratio) is also applied at the level in our notes, the bank keeps ₹171 crore in SLR assets. That leaves about ₹750.5 crore for lending.

What makes the RBI raise or cut CRR

• CRR cut → expansionary (adds money to the system):
• Banks' locked-up cash is freed
• → more money to lend and a bigger multiplier

• → more credit and more spending in the economy.

• CRR raise → contractionary (takes money out of the system):

• More cash is locked up with the RBI
• → less lending

• → demand and prices cool, which helps control inflation.

• CRR is a quantitative (general) tool. It changes the total amount of credit in the whole economy and does not target any one sector.

In India

• Institution: the Reserve Bank of India, set up in 1935, fixes the CRR and holds the balances.
• Law: Section 42 of the RBI Act gives the RBI the power to set the CRR.
• The 2025 cut: announced in June 2025. The CRR was cut by 100 bps in four steps of 25 bps, from 4% to 3% of NDTL [3]. (1 bp, or basis point, = 0.01 percentage point.)
• 3.75% from the fortnight starting 6 September 2025 [3]
• 3.5% from 4 October 2025 [3]
• 3.25% from 1 November 2025 [3]

• 3.0% from 29 November 2025 [3]

• Why it was used alongside repo cuts:

• In 2025 the RBI cut the repo rate from 6.5% to 5.25% by December 2025.
• A repo cut only works if banks pass it on to borrowers.

• The CRR cut released cheap, interest-free funds straight to banks, so they could lend more [3].

• Penalty for falling short: if a bank's reserves fall below the required level, it pays penal charges linked to the bank rate. The bank rate is now aligned with the MSF rate at 5.50% (August 2026) [2].

• Policy setting in 2026: the MPC kept the repo rate at 5.25% with a neutral stance in August 2026 [2]. The CRR stayed at the 3% level reached in the 2025 cuts.

Don't confuse with

• Statutory Liquidity Ratio (SLR): SLR comes from Banking Regulation Act s.24, and the bank keeps it itself as cash, gold or unencumbered government securities (bonds not already pledged for a loan). CRR comes from RBI Act s.42 and is kept with the RBI as cash only.
• Repo rate: the repo rate is the price of borrowing from the RBI (the interest rate at which the RBI lends money to banks for a short time). CRR changes the quantity of deposits that banks must lock away and cannot lend.
• Open market operations (OMO): in an OMO the RBI buys or sells government bonds to add or take out durable (long-lasting) liquidity. A CRR change leaves the RBI's bond holdings alone. Instead, it changes how much of their own deposits banks must park with the RBI.
• Money multiplier: the multiplier is the result and CRR is the input. Multiplier = 1/CRR, so a higher CRR means a smaller multiplier.

Prelims Hooks

• CRR comes from RBI Act s.42, is kept with the RBI and earns no interest. SLR comes from Banking Regulation Act s.24, and the bank keeps it itself. A common trap is to swap the two Acts.
• CRR is calculated on NDTL, not on total deposits. It is kept as an average daily balance [4].
• CRR was cut to 3% of NDTL in four 25-bp steps, announced in June 2025. The last step took effect from the fortnight starting 29 November 2025 [3].
• Simple money multiplier = 1/CRR. A cut from 4% to 3% raises it from 25 to about 33.3.
• CRR cut → liquidity rises → money supply rises. It is a quantitative tool, not a qualitative (selective) one.
• CRR must be held as cash balances with the RBI. Gold and G-secs count only towards SLR.

Mains Points

• A direct way to fix slow transmission:
• When the RBI cuts the repo rate, banks are slow to cut loan rates because they have already promised fixed rates to depositors.

• The 100-bp CRR cut in 2025 gave banks cheap, ready funds for lending [3]. This supported the 125-bp repo cut of 2025.

• Cost to banks and depositors:

• CRR money earns no interest, so a high CRR works like a hidden tax on banks.
• Banks may pass this cost on through lower deposit rates or higher loan rates.

• Lowering the CRR makes lending cheaper, but the RBI then has less of a buffer to pull money out quickly if inflation rises.

• Inflation versus growth:

• The RBI Act asks for price stability "while keeping in mind the objective of growth" [4], with a CPI target of 4% ± 2% for 2026-2031 [4].
• A CRR cut supports growth, but if the extra liquidity lasts too long it can push prices up.
• This is why the RBI followed the 2025 easing with a neutral stance in August 2026 [2].

Related concepts

• Monetary policy
• Expansionary monetary policy
• Contractionary monetary policy
• Quantitative tools of monetary policy
• Net Demand and Time Liabilities
• Statutory Liquidity Ratio
• Bank rate
• Open market operations
• Outright open market operations
• Repo rate

Read more

• Monetary policy and its quantitative instruments