RBI Policy: Cash Reserve Ratio Cut By 50 Bps To 4%; What Is CRR And How It Is Calculated?

The Reserve Bank of India (RBI) in a major good news for loan borrowers, has reduced cash reserve ratio (CRR) by 50 bps to 4% on December 6, 2024. This was the pivotal change by six-member MPC in the latest bi-monthly monetary policy. RBI has kept policy repo rate unchanged.

RBI Monetary Policy Update: While keeping the repo rate unchanged at 6.5% on December 6, 2024, the Reserve Bank of India (RBI) has trimmed the cash reserve ratio (CRR) which is key beneficial for loan borrowers.

In line with estimates, the policy repo rate under the liquidity adjustment facility (LAF) is unchanged at 6.50%. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

What Is CRR?

As per IDFC First Bank's website, The cash reserve is the amount of capital a bank has. The Cash Reserve Ratio (CRR) is the percentage of total deposits a bank must have in cash to operate risk-free. The Reserve Bank of India decides the amount and is kept with them for financial security. The bank cannot use this amount for lending and investment purposes and does not get any interest from the RBI. CRR applies to scheduled commercial banks, while the regional rural banks and NBFCs are excluded.

How Is CRR Calculated And Impacts Common Man?

According to Kotak Securities, the CRR is a specific percentage of a commercial bank's total deposits, as decided by the central bank. For instance, if the CRR rate is 4% and a bank has a total deposit of INR 1,00,000, it will have to set aside INR 4,000 (4% of INR 1,00,000) as reserves.

Its purpose is to ensure that banks have enough liquidity to meet customer withdrawals.

By increasing the CRR rate, RBI can reduce the funds available for loans, thereby contracting the supply of money. Conversely, by reducing the CRR, it can increase the supply of money, as per Kotak's website.