CASH RESERVE RATIO (Syllabus: GS Paper 3 - Economy)

Context: RBI announced a 10% incremental cash reserve ratio (CRR) for banks on the increase in their net demand and time liabilities (NDTL) between 19 May and 28 July. 

• This is primarily to address the liquidity overhang due to the withdrawal of ?2,000 notes.

Cash Reserve Ratio (CRR) 

• It is a certain minimum amount of deposit that the commercial banks have to hold as reserves with the central bank.
• The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio.
• The cash reserve is either stored in the bank’s vault or is sent to the RBI. 
• Banks do not get any interest on the money that is with the RBI under the CRR requirements.
• At the time of high inflation, the government needs to ensure that excess money is not available in the economy.
• To that extent, RBI increases the Cash Reserve Ratio, and the amount of money that is available with the banks reduces. This curbs excess flow of money in the economy.
• When the government needs to pump funds into the system, it lowers the CRR rate, which in turn, helps the banks provide loans to a large number of businesses and industries for investment purposes. 
• Lower CRR also boosts the growth rate of the economy.