Understand Cash Reserve Ratio (CRR), a vital RBI tool for controlling liquidity and ensuring banking stability in India

Cash Reserve Ratio (CRR) in India: Role and Trends During the 1980s and 1990s

• Definition and Legal Basis of CRR

  • The cash reserve ratio (CRR) refers to the cash that banks are required to maintain with the Reserve Bank of India (RBI) as a specified percentage of their demand and time liabilities.

  • According to the provisions of the Reserve Bank of India Act, scheduled commercial banks were required to maintain with the RBI an average daily cash reserve equivalent to three per cent of their demand and time liabilities, based on the outstanding amount as of the preceding Friday.

  • The RBI is authorized to vary the CRR between 3% and 15%, depending on prevailing monetary conditions.

  • The total cash reserves maintained by banks include the minimum statutory reserve of 3%, additional reserves to bridge the gap between the statutory reserve and actual CRR, and reserves related to incremental demand and time liabilities as notified.

• Policy Use of CRR During the 1980s and 1990s

  • In the 1980s, the CRR was frequently adjusted as a key policy instrument. In early 1987, due to rising liquidity, the RBI raised the CRR from 9% to 9.5%, effective February 28, 1987, to absorb excess liquidity without disrupting credit flow to productive sectors.

  • During 1990–91, the Narasimham Committee recommended continuing the use of CRR as a tool for monetary control, while recognizing the need to reduce its high levels. In May 1991, a 10% incremental CRR was introduced.

  • In 1993–94, due to a high fiscal deficit and a rise in net foreign exchange assets in the second half of the year, the RBI raised the CRR from 14% to 15% in three phases as per the monetary policy announcement on May 14, 1994.

  • The year 1996–97 was notable for a sharp reduction in CRR — a total cut of 4 percentage points across five phases within the financial year.

• Impact of CRR on Banking and Money Supply

  • The CRR served as a major instrument in the monetary policy framework of the 1980s. Its trend during the decade was generally high, indicating tight monetary conditions.

  • An increase in CRR mandates banks to hold a larger portion of their deposits with the RBI, thereby reducing the volume of funds available for lending. This impacts bank profitability and reduces money supply.

  • The RBI uses CRR as a tool to either inject or absorb liquidity in the system, depending on whether it aims to expand or contract money supply.

  • New RBI Rates 06 June, 2025 : SLR 18.00%, CRR is 3.00%, MSF is 5.75%, Repo Rate is: 5.50%, Reverse Repo Rate is 3.35%, and Bank Rate 5.75%..