Cash Reserve Ratio (CRR) Cut: What You Need to Know

Understanding the Cash Reserve Ratio (CRR)

The Cash Reserve Ratio (CRR) is a crucial monetary policy tool used by the Reserve Bank of India (RBI). It represents the percentage of a bank's total deposits that must be held in liquid cash with the RBI. This reserve cannot be lent out or utilized for investment purposes, ensuring that banks maintain a level of liquidity to support their operations.

Why Did the RBI Cut the CRR?

The recent decision by the RBI to cut the CRR aims to inject liquidity into the banking system. This strategic move is designed to encourage banks to lend more to businesses and individuals, thereby stimulating economic growth. This cut also marks a reversal of the tightening cycle that began in April 2022, when the RBI raised interest rates to combat rising inflation.

Details of the CRR cut

The RBI has implemented a 50 basis points (bps) reduction in the CRR, decreasing it from 4.5% to 4%. This adjustment is expected to release approximately ₹1.16 lakh crore into the banking system, enhancing the available funds for lending.

Implementation Timeline

The CRR cut will be enacted in two phases:

• 25 bps reduction effective from the fortnight beginning December 14, 2024.
• 25 bps reduction effective from the fortnight beginning December 28, 2024.

Significance of the CRR Cut

This CRR cut is significant as it has the potential to positively impact the Indian economy. The RBI aims to encourage lending, which is essential for boosting economic growth, especially amid global challenges, such as the ongoing conflict in Europe. By increasing liquidity, the RBI is attempting to create a more conducive environment for businesses and consumers to thrive.

Frequently Asked Questions (FAQs)

Q1. What is the difference between CRR and SLR?
Answer: CRR is the percentage of a bank's deposits that it must maintain in cash with the RBI, while SLR (Statutory Liquidity Ratio) is the percentage that must be held in liquid assets like government securities.

Q2. How does the CRR affect interest rates?
Answer: Lowering the CRR gives banks more funds to lend, which can lead to a decrease in interest rates for loans, making borrowing more affordable.

Q3. What is the impact of the CRR cut on inflation?
Answer: A CRR cut can potentially raise inflation if it significantly boosts lending and demand. However, the RBI remains committed to controlling inflation levels.

Q4. What is the outlook for the Indian economy?
Answer: Although the RBI has lowered its GDP growth forecast for FY25 to 6%, it maintains an optimistic view on the long-term growth prospects of the Indian economy.

UPSC Practice MCQs

Question 1: What does CRR stand for in banking terms?
A) Cash Reserve Ratio
B) Credit Reserve Ratio
C) Current Reserve Ratio
D) Capital Reserve Ratio
Correct Answer: A

Question 2: By how much was the CRR recently cut?
A) 25 basis points
B) 50 basis points
C) 75 basis points
D) 100 basis points
Correct Answer: B

Question 3: What is the primary purpose of cutting the CRR?
A) To increase taxes
B) To inject liquidity into the banking system
C) To raise interest rates
D) To decrease bank deposits
Correct Answer: B

Question 4: What major global factor is currently impacting the Indian economy?
A) Increased domestic production
B) Ongoing war in Europe
C) High employment rates
D) Lower interest rates
Correct Answer: B

Question 5: What is the CRR after the recent cut?
A) 4.5%
B) 4%
C) 3.5%
D) 5%
Correct Answer: B