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3/23/2017 CashReserveRatio(CRR)Arthapedia

CashReserveRatio(CRR)
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CashReserveRatioreferstothefractionofthetotalNetDemandandTimeLiabilities(NDTL)ofaScheduled
CommercialBankheldinIndia,thatithastomaintainascashdepositwiththeReserveBankofIndia(RBI).
Therequirementappliesuniformlytoallbanksinthecountryirrespectiveofanindividualbanksfinancial
situationorsize.Incontrast,certaincountriese.g.Chinastipulatesseparatereserverequirementsforlargeand
smallbanks.

AspertheRBIAct1934,allScheduledCommercialBanks(thatincludespublicandprivatesectorbanks,
foreignbanks,regionalruralbanksandcooperativebanks)arerequiredtomaintainacashbalanceonaverage
withtheRBIonafortnightlybasistocatertotheCRRrequirement.NonBankFinancialCorporations
(NBFCs)areoutsidethepurviewofthisreserverequirement.ActalsoauthorizesRBItostipulateanadditional
orincrementalCRR,which,however,hasnotbeenputinplacebyRBI.

Bankshavetomaintain100percentCRRonanaveragebasisduringthefortnight.Thatis,itisnotnecessary
thatonalldaysCRRhastobeat100%.WitheffectfromDecember28,2002allbankswererequiredto
maintainaminimumof70percentoftherequiredaveragedailyCRRonalldaysofthefortnight.Later,with
effectfromthefortnightbeginningSeptember21,2013entitieswererequiredtomaintainminimumCRR
balancesupto95percentoftheaveragedailyrequiredreservesforareportingfortnightonalldaysofthe
fortnight.Thiswaslaterreducedto90percentwitheffectfromthefortnightbeginningApril16,2016.

Traditionally,theamountheldtocatertotheCRRrequirementwasstipulatedtobenolowerthan3percentand
nohigherthan20percentofthetotalNDTLheldinIndia.However,theRBI(amendment)Act,2006provides
forremovalofthefloorandceilingwithrespecttosettingtheCRRandauthorizestheRBItosettheratioin
keepingwiththebroadobjectiveofmaintainingmonetarystabilityintheeconomy.

Presently,banksarenotpaidanyinterestonbehalfoftheRBIforparkingtherequiredcash.Ifabankfailsto
meetitsrequiredreserverequirements,theRBIisempoweredtoimposeapenaltybychargingapenalinterest
rate.

Historically,theCRRwasmootedasaregulatorytool.However,overtheyearsandespeciallyafterthe
liberalizationoftheIndianeconomyintheearly1990s,withtheeconomyexperiencingsubstantialinflowsof
capitalexertingstressontheleverageofthecentralbanktomanipulateliquidityconditionsinthedomestic
moneymarket,theCRRassumedimportanceasoneoftheimportantquantitativetoolsaidinginliquidity
management.IncontrasttotheLiquidityAdjustmentFacility(LAF)(http://www.arthapedia.in/index.php?
title=Liquidity_Adjustment_Facility_(LAF)),whichaidsliquiditymanagementonadailybasisviachangesin
repoandreversereporates,changesintheCRRisaimedatthesameinthemediumterm.

TheCRRwasreducedfromalevelof8.5percentinAugust2008to6percentinSeptember,2008toease
liquidityindomesticmarketsonthefaceoftheglobalfinancialcrisis.Thecutcontinuedthrough2008reaching
alevelof5percentinJanuary2009.TheCRRwasmaintainedatthislevelthroughout2009andeventually
raisedto6percentinApril,2010.EffectivefromthefortnightbeginningFebruary09,2013,theCRRis
prescribedat4%.CRR,asonApril2016standsat4%.

AcountrythatusestheCRRaggressivelytocontroldomesticliquidityandtargetthemonetaryrootsof
inflationisChina.

http://www.arthapedia.in/index.php?title=Cash_Reserve_Ratio_(CRR) 1/2
3/23/2017 CashReserveRatio(CRR)Arthapedia

TheRBIwebsite(www.rbi.org.in)carriesinformationontheprevailingpolicyratesincludingCRR.Various
publicationsbytheRBI,includingmonthlybulletins,discussandanalyzerationalebehindchangesand
expectedeffectsofCRRchangesasandwhentheneedarises.

AlsoSee
StatutoryLiquidityRatio(SLR)(http://www.arthapedia.in/index.php?title=Statutory_Liquidity_Ratio)
MarginalStandingFacility(MSF)(http://www.arthapedia.in/index.php?
title=Marginal_Standing_Facility)
LiquidityAdjustmentFacility(LAF)(http://www.arthapedia.in/index.php?
title=Liquidity_Adjustment_Facility_(LAF))
BaseRate(http://arthapedia.in/index.php?title=Base_Rate)
MarketStabilizationScheme(MSS)(http://arthapedia.in/index.php?
title=Market_Stabilization_Scheme_(MSS))
PolicyRate(http://arthapedia.in/index.php?title=Policy_Rate)
BankRate(http://arthapedia.in/index.php?title=Bank_Rate)
InterestRateCorridor(http://arthapedia.in/index.php?title=Interest_rate_corridor)
RepoandReverseRepoRate(http://arthapedia.in/index.php?title=Repo_Rate_and_Reverse_Repo_Rate)

References
CentralBankBalancesandReserveRequirements,SimonGray,IMFWorkingPaperNo.WP/11/36,
February,2011.</p>

Contributedby
RangeetGhosh,IES(2008)(http://www.ies.gov.in/myaccountprofileview.php?memid=359)
Emailrangeetghosh1980@yahoo.co.in(mailto:rangeetghosh1980@yahoo.co.in)

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Thispagewasfirstcreatedon21August2011,at01:01andlastmodifiedon12May2016,at17:03.
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