What is CRR? | Cash Reserve Ratio
The percentage of total deposits that commercial banks must keep as cash with the RBI. Learn why banks cannot earn interest on this money.
The Core Concept
Cash Reserve Ratio (CRR) is a specific amount of cash that banks have to maintain with the RBI as a percentage of their Net Demand and Time Liabilities (NDTL).
No Interest Earned
Banks do not earn any interest on the money kept as CRR with the RBI. This makes it a powerful but 'expensive' tool for controlling liquidity.
Why does RBI use CRR?
Liquidity Management
By increasing CRR, the RBI sucks out excess liquidity from the system. By decreasing it, RBI injects more money into the market for lending.
Credit Control
High CRR reduces the banks' capacity to lend, thereby controlling the credit creation in the economy.
CRR vs Repo Rate
| Feature | CRR | Repo Rate |
|---|---|---|
| Nature | Ratio of Deposits | Interest Rate |
| Interest | 0% (Earns nothing) | Charged by RBI |
| Main Focus | Direct Liquidity | Cost of Borrowing |