Definition
Cash Reserve Ratio Impact
The CRR impact is the effect on banks' lendable funds and money supply of the share of deposits they must keep as cash with the RBI, which earns no interest.
Under the CRR, banks park a percentage of their net demand and time liabilities with the RBI in cash, on which they earn nothing. This is a pure cost: it raises the effective cost of funds and shrinks the pool available for lending.
When the RBI raises CRR it drains liquidity and tightens money supply; when it cuts CRR it releases funds for lending. Because CRR balances earn no return, a cut directly improves bank margins, making CRR a powerful but blunt monetary tool.
Related terms
- Cost of FundsCost of Funds is the weighted-average interest rate a bank or NBFC pays to raise the money it lends, covering deposits, borrowings and bonds.
- Liquidity Adjustment Facility (LAF)The LAF is the RBI's framework for managing day-to-day banking-system liquidity through tools such as the repo, the Standing Deposit Facility and the Marginal Standing Facility.
- Statutory Liquidity Ratio ImpactThe SLR impact refers to how the minimum share of deposits banks must hold in government securities and other approved assets affects their lending capacity and earnings.
- CRR (Cash Reserve Ratio)The CRR is the share of a bank's deposits it must park as cash reserves with the RBI, earning no interest, which the RBI adjusts to control liquidity in the banking system.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.