Maintenance of Cash Reserve Ratio (CRR)
The Reserve Bank of India (RBI) has announced a phased reduction in the Cash Reserve Ratio (CRR) of all banks. This decision was detailed in the Statement on Developmental and Regulatory Policies released on December 6, 2024, and modifies an earlier circular, DOR.RET.REC.33/12.01.001/2022-23, dated May 4, 2022.
The CRR, a monetary policy tool used to regulate liquidity in the banking system, is being reduced by 50 basis points in total. This reduction will occur in two equal tranches of 25 basis points each. Banks are required to maintain a CRR of 4.25% of their Net Demand and Time Liabilities (NDTL) from the reporting fortnight starting December 14, 2024, and 4.00% from the fortnight beginning December 28, 2024.
The phased reduction in CRR aims to enhance liquidity in the banking system, potentially facilitating credit growth and supporting economic activity. A lower CRR means banks will have more funds available for lending and investments, contributing to the overall economic momentum. This move aligns with the RBI’s ongoing efforts to fine-tune monetary policy to balance growth and inflation dynamics.
The notification regarding this decision, DoR.RET.REC.53/12.01.001/2024-25, dated December 6, 2024, outlines the legal framework for this change. The RBI has exercised its powers under Section 42(1) of the Reserve Bank Act, 1934, and Section 18(1) of the Banking Regulation Act, 1949, read in conjunction with Section 56. This legal foundation enables the central bank to prescribe the CRR that banks must maintain.
The CRR is calculated as a percentage of a bank’s NDTL, which includes demand and time liabilities such as savings deposits, fixed deposits, and current account balances. By reducing the CRR, the RBI releases funds previously locked in reserve accounts, thus increasing liquidity in the system.
The earlier notification, DOR.RET.REC.34/12.01.001/2022-23, dated May 4, 2022, is partially modified through this change. Banks are expected to adhere strictly to the revised CRR requirements to ensure compliance and maintain systemic stability.
This move reflects the RBI’s proactive stance in adapting to economic conditions and ensuring adequate liquidity for sustainable growth. The phased approach provides banks with sufficient time to adjust their balance sheets and manage their reserves effectively.
