Cash Reserve Ratio
The Cash Reserve Ratio is the amount of funds that the banks are bound to keep with Reserve bank of India as a portion of their Net Demand and Time Liabilities (NDTL). The objective of CRR is to ensure the liquidity and solvency of the Banks. The CRR is maintained fortnightly average basis.
Impacts of Reducing CRR
When CRR is reduced, more funds are available to banks for deploying in other businesses because they need to keep fewer amounts with RBI. This means that the banks would have more money to play and this leads to reduction of interest rates on Loans provided by the Banks.
In context with inflation, reduction in CRR leaves more money in the hands of commercial banks and this leads to increase in the money supply in system. When money supply increases, too much money chases too few goods and this leads to rise in inflation.
Impacts of Increasing CRR
When RBI increases the CRR, less funds are available with banks as they have to keep larger protions of their cash in hand with RBI. This means that banks will now have less money to play with. Moreover, Reserve Bank does not pay any interest on the CRR balances. Since commercial banks don’t earn any interest, the banks are left with an option than to increase the interest rates. If RBI hikes this rate substantially, banks will have to increase the loan interest rates. The home loans, car loans and EMI of floating Rate loans increase. Thus hike in CRR leads to increase of interest rates on Loans provided by the Banks.
Reduction in CRR sucks money out of the system causing to decrease in money supply. When money supply decreases, the inflation comes down.
Ceiling on CRR
Please note that earlier RBI was empowered to fix RBI between 3-20% by notification. However, from 2006 onwards the RBI is empowered to fix the CRR on its discretion without any ceiling.
Do banks earn interest on CRR?
They used to do once upon a time. From March 31, 2007 onwards, RBI does not pay any interest on the CRR balances maintained by Scheduled Commercial Banks.
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Abhishek Verma
July 9, 2011 at 11:04 amSuperb presentation skill Sir….
ipsita
August 22, 2011 at 12:05 pmits so useful and easy to understand.thanks.
akhilesh
September 4, 2011 at 8:05 pmits really a very nice but there is a problem when download pdf there is not showing the chart……..
rohit salotra
September 27, 2011 at 12:40 pmsir, its really helpfull for me being posted on very remote area nd hardly getting any magazine, thanks a lot sir, god blesss
ramu
October 10, 2011 at 10:53 pmVery Good …..Keep it up….
ALl this information can be obtained in
Hand Book of Banking Information
ramu
October 10, 2011 at 10:56 pmplease tell me some good websites
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Yogesh
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satyajit
December 31, 2011 at 9:31 ameasy to understand
savita dharpure
January 16, 2012 at 5:39 pmeasy to understand
HITESH
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nimmi
January 21, 2012 at 3:40 pmits a site with complete information requried for any of competitive exam. thank u soo… much :-)
Mathan
February 26, 2012 at 7:22 pmPerfect Explanation..Thank you G K Today
vivekkk
March 3, 2012 at 12:16 pmSir CRR was explained in such a simplistic manner that menot being from a commerce background also had easily undrstood it in one reading
eswari
March 28, 2012 at 3:41 pmafter read this only i got clear idea about this crr
niraj762
April 1, 2012 at 7:07 amPlease update the CRR to 4.75% w.e.f Mar 12. There was a cut of 0.75% in CRR in Mar 12.
Rahul
April 1, 2012 at 6:53 pmCRR pe interest ka kya concept hai?
Dravid
May 21, 2014 at 9:33 pmNo interest on CRR….This is only a ratio….
seema
May 15, 2012 at 7:34 pmInterest on CRR means if you are reserving Rs. 100 you will able to use Rs. 91 only
Kmasha10
May 22, 2012 at 11:24 amReally great and very use full for aspiring candidates.
amol
July 23, 2012 at 2:38 pmsir suggest any books as more concepts of banking and include all information of banking….please.
samta
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sneha jha
August 20, 2012 at 9:52 amthanks gk today for providing such a great service for youths and helping in shaping carerr by regular guide and ofcourse best site for enriching gk.
neha
October 24, 2012 at 11:31 pmthanks alot gk today group for providing such a g8 material ……………………..
MANORANJAN
November 8, 2012 at 4:55 pmKindly change current CRR Ratio 4.25% from 5.5% in the top of the paragraph. Because the current CRR Ratio is 4.25 from 1st Nov 2012
Tuya
January 26, 2013 at 3:39 pmSir …superb…mindblowing…U r great…U r backbone of many banking aspirants…….
vikas ranjan
February 4, 2013 at 7:29 pmThanks a lots to GK Today Team for providing more effective GK supplements.
Shanmugapriya
February 8, 2013 at 11:26 amThanx a lot. Simple and easy to understand.
rahul
February 8, 2013 at 7:13 pmwhat is the meaning of drain out the excess liqidity ? why rbi increase crr if it is favorable to customer as well as for banks?
goudgyellaiah
March 19, 2013 at 6:34 pmTHIS IS VERY VERY HELPFUL TO BANKING INTERVIEWERS
ravikumar
April 17, 2013 at 4:31 pmusefulllllllllllll infrmation thnk u s much
sharma gsn on 21st jun,2013
June 21, 2013 at 2:57 pmIt is very useful for the bank staff as well as the one who wants to go for bank jobs. Thanq very much.
Mythili
August 22, 2013 at 5:04 pmTHank u so much sir… very useful and informative… keep going ang keep teaching sir… thnk u again sir…
sammy
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hitesh
May 25, 2014 at 11:15 pmsir, could you please tell me that when CRR increase or decrease, means which factors affect it ?
yesbeer arya
June 2, 2014 at 2:51 pmit so easy and useful knowledge provided
sir for preparation.
praveen
July 29, 2014 at 11:43 amthanks…………for support us
raghee
August 26, 2014 at 9:00 amThank you so much. Very easy to understand and easy to access.
shradhnjali
August 27, 2014 at 11:22 amreally very useful thanks
Nitish Bhardwaj
September 2, 2014 at 7:37 amThanx sir….really nice & helpful
sneha
September 5, 2014 at 1:24 pmThanks for making it so simple to understand
pinak
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droupadi nayak
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vishal
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sreedhar
November 20, 2014 at 10:24 pmthnks to admini………..
SANJEEV KUMAR
November 24, 2014 at 5:49 pmIt is easy to understand
eshwara pandiyan
January 2, 2015 at 12:47 pmgreat work………. keep it up…….
and thanks a lot……….cheers………
Avinash
January 3, 2015 at 8:38 amMany thanks.. good explanation
shiv mahima ojha
March 2, 2015 at 10:32 pmIts really nice…….& helpful
PIYUSH
January 19, 2018 at 7:20 pmTHERE MUST BE CORRECTION IN THE FOLLOWINF LINE, INSTEAD OF REDUCTION IT SHOULD BE INCREASE IN CRR
“Reduction in CRR sucks money out of the system causing to decrease in money supply. When money supply decreases, the inflation comes down.”
J.Nisha
February 5, 2018 at 12:31 pmIt’s Use full
Vinay
February 5, 2018 at 12:33 pmIt’s Awesome