Cash Reserve Ratio: Meaning & Current RBI CRR 2025

CRR’s full form is Cash Reserve Ratio. It is the portion of a bank’s total deposits that it has to keep with the RBI in cash. This money is not available for lending or investment. It acts as a safeguard to make sure banks don’t run out of money when customers withdraw their deposits.

Here’s an example to help with a better understanding of the cash reserve ratio definition.

If CRR is 4% and a bank has deposits of ₹1,000 crore, it must keep ₹40 crore with the RBI. The remaining ₹960 crore is available with the bank to give loans, invest, or manage expenses.

This way, CRR ensures there’s always a backup with banks, and the RBI can control the supply of money in the economy.

CRR is an important tool for stabilising the banking system and the broader economy. Here’s why it matters:

Controls inflation

By adjusting CRR, the RBI can reduce or increase the funds available for lending. A higher CRR slows down inflation, while a lower CRR supports growth.

Maintains liquidity balance

CRR helps maintain the right amount of liquidity in the system. Too much liquidity can lead to inflation, while too little can slow down economic activity.

Ensures financial stability

Since banks deposit a portion of funds with the RBI, CRR guarantees safety and stability in case of sudden customer withdrawals.

Monetary policy tool

CRR is one of RBI’s key tools, along with Repo Rate and Statutory Liquidity Ratio (SLR), to drive the economy in the right direction.

Boosts public confidence

When customers know that a part of their deposits is held securely by the RBI, it increases trust in the banking system.

The calculation of CRR is simple. It is based on a bank’s Net Demand and Time Liabilities (NDTL).

The formula for calculating the cash reserve rate is as follows:

CRR (%) = NDTL / Deposits

Where,

NDTL refers to the total customer deposits with a bank/financial institution, minus deposits in the form of assets held by other banks/financial institutions.

Deposit refers to the amount banks/lenders currently have.

The RBI changes CRR mainly to manage inflation, liquidity, and economic stability. Here’s a brief overview of the reasons:

To control inflation

When inflation is high, the RBI increases CRR. This forces banks to keep more money with the RBI, leaving them with less money to lend. As loans become less available and costlier, people borrow less, demand reduces, and prices come under control.

To boost growth

When economic growth is slow, the RBI lowers CRR. This releases more money for banks to lend. Businesses and individuals borrow more, which increases spending, production, and growth.

To manage liquidity

Liquidity simply means the amount of money moving in the system. RBI uses CRR to balance this flow. If too much money is floating, the RBI can absorb it by increasing CRR. On the other hand, if there is a shortage, it can reduce CRR to inject liquidity.

This is a crucial question in the understanding of CRR. The RBI reviews it at least four times a year during its Monetary Policy Committee (MPC) meetings. However, it doesn’t change the CRR every time. Sometimes CRR remains the same for months or years if economic conditions are stable.

The RBI may call additional meetings outside the schedule if the economy needs demand or there are issues to be tackled. The most common reasons for adjusting the CRR are inflation, economic growth, or liquidity.

In other words, while the RBI can change the CRR multiple times a year, changes are less frequent and occur only when necessary.

The current cash reserve ratio is 4%.

However, during its 6th June 2025, MPC meeting, the RBI announced a 1% reduction in CRR (from 4.0% to 3.0%) in four equal steps of 0.25% each. This change will be implemented gradually from September to December 2025.

This means by the end of 2025, CRR will stand at 3.0%.

This reduction was made to increase liquidity (money supply) in the banking system, which can boost lending and economic activity.

CRR directly affects how much money banks can lend, which in turn influences inflation, interest rates, and overall economic activity. Let’s explore its individual impact on inflation and lending.

Impact on inflation

When the RBI increases CRR, banks are required to keep a larger share of their deposits with the RBI. This reduces the amount of money available for lending and spending in the economy. With less money in circulation, demand for goods and services slows down, which helps bring down rising prices.

On the other hand, when the RBI reduces CRR, banks have more funds to lend. As loans become more available, people borrow to buy homes, cars, or expand businesses. This raises demand for goods and services, which can push prices up. So, a lower CRR can help the economy grow, but it may also create inflationary pressure if not carefully managed.

Impact on lending

A higher CRR creates a cash crunch for banks because more money is locked with the RBI. To manage the limited funds they have, banks often increase lending rates or the interest charged on loans. This makes borrowing less affordable for businesses and individuals, reducing loan demand.

When CRR is reduced, banks enjoy higher liquidity. With surplus funds, they compete to lend, often lowering lending rates to attract borrowers. Cheaper loans encourage people to take credit for housing, vehicles, education, and business expansion, boosting economic activity.

Banks face strict penalties if they fail to maintain the required CRR balance with the RBI.

• If a bank does not keep the minimum cash reserve for even a single day, the RBI can impose a penalty interest. For the first day of default, the bank may have to pay interest at 3% above the Bank Rate.

• If the shortfall continues, the penalty can increase to 5% above the Bank Rate.

For example, suppose the CRR rate is 6.5%. If a bank falls short of maintaining ₹100 crore in its CRR balance:

• On the first day, the penalty will be 6.5% + 3% = 9.5%. That means the bank has to pay ₹9.5 crore as penalty interest per year on the shortfall amount.

• If the shortfall continues beyond the first day, the penalty becomes 6.5% + 5% = 11.5%, which means ₹11.5 crore per year on the ₹100 crore shortfall.

This penalty makes it very costly for banks to ignore CRR requirements. The strict penalty system ensures that banks comply with the rules, developing a safe and reliable financial system for depositors.

The Statutory Liquidity Ratio (SLR) is another critical component of the monetary policy. Banks must adhere to it as well. Thus, an understanding of the difference between CRR and SLR is beneficial.

Cash Reserve Ratio may seem like a mathematical and economic aspect, but it is one of the most important tools the RBI uses to manage India’s economy. By adjusting CRR, the central bank can influence how much money banks lend, how affordable loans become, and how fast prices rise or fall.

In 2025, CRR is adjusting from 4% to 3% to release more liquidity and support growth, showing how the RBI responds to changing economic needs. While changes in CRR may not be frequent, their impact reaches a large part of the population through EMIs, interest on savings, or the prices paid in the market.

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