CRR
Also written Cash Reserve Ratio
The minimum percentage of a bank's total deposits that it must hold as cash reserves with the central bank, earning no interest — one of RBI's tools for controlling money supply.
In plain language
Banks cannot lend out every rupee they take in as deposits. A slice of every deposit has to be parked, untouched, with the central bank.
That slice is the Cash Reserve Ratio. It sits alongside Statutory Liquidity Ratio (SLR) as a monetary policy tool — the workbook's distinction is that CRR must be held strictly as cash with the central bank, while SLR can be held in cash equivalents such as gold and government securities.
How it works
The workbook: "Cash Reserve Ratio (CRR) (minimum percentage of the total deposits, which commercial banks have to hold as cash reserves with the central bank) and Statutory liquidity ratio (SLR) (minimum percentage of the total deposits, which commercial banks have to hold in cash equivalents such as gold and government of India securities)."
For an analyst covering banks specifically, Chapter 6.7.3 lists "cash reserve ratio and statutory liquidity reserve ratio" among the sector's key metrics, alongside net interest margin and capital adequacy — because a bank's ability to lend, and therefore its growth, depends directly on how much of its deposit base these two ratios lock away.
A worked example
Illustrative figures — the workbook does not state a current CRR percentage.
A bank with Rs 8,00,000 crore of total deposits, facing a CRR of 4%, must keep Rs 32,000 crore parked with the central bank, earning no interest.
If the central bank raises CRR by 50 basis points, to 4.5%, the bank must lock away an additional Rs 4,000 crore. That is Rs 4,000 crore it can no longer lend out — directly tightening the funds available to borrowers across the economy, which is exactly why CRR is used as a monetary policy lever.
Why NISM asks about it
Chapter 5.3.7 (Monetary Policies) and Chapter 6.7.3 (banking KPIs) both reference CRR. Expect a question distinguishing CRR from SLR — cash only, versus cash equivalents including gold and government securities — and one on CRR's role as a tool for controlling money supply.
Common exam traps
- CRR is held strictly in cash with the central bank; SLR can be held in gold or government securities. Swapping the two definitions is the most common error.
- The workbook does not state a current numeric CRR or SLR rate — do not answer with a specific percentage unless the question supplies it.
Check yourself
1.Statutory Liquidity Ratio (SLR) refers to the minimum percentage of total deposits which commercial banks have to hold in:
- a)Cash reserves with the central bank
- b)Cash equivalents such as gold and Government of India securities
- c)Current accounts with other commercial banks
- d)Foreign currency assets
Show the answer
Answer: (b) Cash equivalents such as gold and Government of India securities
SLR is the minimum percentage of total deposits banks must hold in cash equivalents such as gold and Government of India securities — held by the bank itself.
Option A is the definition of CRR — the Cash Reserve Ratio is the minimum percentage of total deposits held as cash reserves with the central bank. Both definitions begin with the identical phrase "minimum percentage of the total deposits", so the phrase cannot separate them. What separates them is the form of the asset (cash versus gold and G-secs) and where it is held (with the central bank versus with the bank itself).
Options C and D are not part of either definition.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Bank RateThe rate at which the central bank lends to commercial banks without collateral, for medium to long-term or emergency needs — one of RBI's tools for controlling money supply and rates.
- Monetary policyThe central bank's management of money supply and interest rates to promote growth and hold prices stable — expansionary when it wants to push the economy up, contractionary when it wants to cool it.
- Repo rateThe rate at which the central bank lends money to banks for a very short term against approved securities — the main lever it pulls to make money cheaper or dearer.
- Reverse repoThe transaction where the central bank borrows money from banks against securities, paying interest on it — the mirror image of a repo, where the central bank instead lends.
- SLRThe minimum percentage of a bank's total deposits it must hold in cash equivalents such as government securities and gold, rather than as cash — a companion tool to CRR.