CRR (Cash Reserve Ratio)

How it works

Every commercial bank must keep a fixed percentage of its total deposits as reserves with the RBI, held in cash form. This is the Cash Reserve Ratio. The money earns no interest, so it is a real cost to banks, and crucially it cannot be lent out to anyone.

By raising the CRR, the RBI locks up more bank money and tightens system liquidity; by cutting it, the RBI frees up funds that banks can lend, easing credit conditions. It is a blunt but powerful liquidity tool, operating quite separately from the headline repo rate.

In India

The RBI uses the CRR alongside the repo rate as complementary levers. A CRR cut releases a large slug of lendable funds into the system, which can lower money-market rates and support credit growth. During 2025, the RBI cut the CRR by a substantial margin to inject durable liquidity into the banking system, while also lowering the repo rate to support growth.

Because CRR balances earn nothing for banks, a cut also modestly improves bank profitability, which is one reason bank stocks often react positively to a CRR reduction.

Why it matters

The CRR affects how much banks can lend, which feeds into both deposit and loan rates and overall economic liquidity. For borrowers and depositors, CRR moves shape the rate backdrop; for bond and equity investors, a CRR cut is typically read as a liquidity-positive, pro-growth signal that supports markets.

Common mistakes

Don't confuse the CRR with the SLR — the Statutory Liquidity Ratio, which banks hold in approved securities like G-Secs and which *does* earn a return. And don't treat the CRR as the RBI's main signalling tool; that role belongs to the repo rate. The CRR is primarily about managing the *quantity* of system liquidity rather than the *price* of money.