Cash Reserve Ratio (CRR)

Cash Reserve Ratio (CRR): Recently, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) cut the policy repo rate by 50 basis points to 5.50% to stimulate economic growth.

o Additionally, the RBI announced a staggered reduction of 100 basis points in the Cash Reserve Ratio (CRR) over the year.

• About CRR: CRR is the portion of a bank’s total deposits that must be kept as liquid cash reserves with the RBI. As of the latest update, the CRR stands at 3%.
• Regulation and Objectives of CRR: Set and enforced by the country’s central bank (RBI).

o Main objective: to ensure banks maintain a minimum level of liquidity relative to their liabilities.

o This helps prevent liquidity shortages during times of increased demand for funds.

o Calculated as a percentage of Net Demand and Time Liabilities (NDTL).

o NDTL refers to the total demand and time liabilities of a bank, including aggregate savings and deposits.

• About Repo rate (Repurchase Agreement Rate): The interest rate at which commercial banks borrow funds from the central bank.

o It enables banks to meet short-term liquidity requirements by borrowing money.

o Banks provide securities as collateral and agree to repurchase them later at a higher price that includes interest.