The cash reserve ratio (CRR) is the percentage of the total deposits a bank needs to maintain as liquid cash. This is a requirement of the RBI which maintains the cash reserve/ A bank can neither earn interest on this liquid cash maintained with the RBI nor use it for investing and lending purposes.
RBI has issued several policy changes post the pandemic and after the conflict in Europe. They are as follows:
- Policies aimed at increasing economic growth.
- Policies to keep inflation in control by increasing repo rates
- New policies on liquidity and financial market control.
- Policies to increase the cash reserve ratio.
The Reserve Bank of India, by the notification dated 04.05.2022[1] announced the increase of the cash reserve ratio of all the banks by 50 base points, from 4.00 per cent to 4.50 per cent of their net demand and time % demand liabilities (NDTL). The withdrawal of liquidity through this increase in the CRR would be of the order of 87,000 crores.
“Time liabilities”refer to the liabilities which the commercial banks are liable to repay to the customers after an agreed period, and “demand liabilities” are customer deposits which are repayable on demand.
These changes have been made in exercise of the powers conferred under :
- Section 42(1) of Reserve Bank of India Act, 1934 states that all Scheduled Banks (i.e. those banks which have been included in the Second Schedule of Reserve Bank of India Act, 1934) are required to maintain with Reserve Bank of India, a Cash Reserve Ratio (CRR) of 4% of Net Demand and Time Liabilities (NDTL) and,
- Section 18(1) of the Banking Regulation Act, 1949 says that every banking company, not being a scheduled bank, shall maintain in India by way of cash reserve with itself or by way of balance in a current account with the Reserve Bank, or by way of net balance in current accounts or one or more of the aforesaid ways, a sum equivalent to at least 3% of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight and shall submit to the Reserve Bank before the 20th day of every month a return showing the amount so held on alternate Fridays during a month with particulars of its demand and time liabilities in India on such Fridays or if any such Friday is a public holiday under the Negotiable Instruments Act, 1881 (26 of 1881), at the close of business on the preceding working day, in addition to being read with Section 56 of the Banking Regulation Act, 1949.
The above changes have been made as an alteration to the previous notification which was issued on the 5th of February 2021[2], in which the RBI notified that the Cash Reserve Ratio required to be maintained with the RBI was 3.50 per cent.
1https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12313&Mode=0#AN
2https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12020&Mode=0#AN
