DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name Staff Member : P. BADARINARAYANA
Designation : Sr. Lecturer
Branch : DCCP
Institute : Govt. Polytechnic, NELLORE
Year/Semester : VI Semester
Subject : Banking II
Sub. Code : CCP-604(B)
Topic : Functions of RBI.
Duration : 50 Mts.
Sub Topic : Cash Reserve Ratio
Teaching Aids : Animations
CCP604(B)45 1
Objective :

On completion of this period, you

would be able to
 Comprehend another quantitative method
of credit control, namely, the variable
reserve requirements

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Recap

So far you have learnt the various

Quantitative methods of credit control by
RBI.
 Bank Rate
 Open Market Operations

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Cash Reserve Ratio:

 Commercial banks in India have to maintain with

RBI cash reserves of not less than 3% of their total
time and demand liabilities.
 This is a legal obligation on all banks to maintain
the reserve which is called as Cash Reserve Ratio

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Cash Reserve Ratio:

 The Reserve Bank can change the

amount of cash reserves of banks and
affect their credit creating capacity.
 The reserve requirements were initially
evolved as a means to safeguard the
interests of depositors but later
developed as an instrument of credit
control.

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Cash Reserve Ratio:

 As per RBI Act, 1934, every scheduled

bank has to maintain with RBI, an
average daily balance of not less than 3
per cent of its demand and time
liabilities.

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Cash Reserve Ratio:

The Act also empowers RBI to increase

the said rate of three per cent of cash
reserve, by a notification in the Gazette
of India, to the maximum extent of
fifteen per cent.

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Cash Reserve Ratio:
 The method of cash reserve ratio is a
effective tool being employed by the
Reserve Bank to control expansion or
contraction of credit in the economy.
 If the bank deposits in the country
exceed the desirable limit, the RBI may
contain this trend by raising the Cash
Reserve Ratio so as to curb inflationary
pressure on the economy.

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Cash Reserve Ratio:

 As a result, the banks will have to keep

more balance with RBI, and thus their
lendable resources will deplete.
 On the other hand, the the RBI may reduce
the cash reserve ratio in order to
accelerate the business activity by lending
more money by banks, to control deflation.

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Cash Reserve Ratio:

 The RBI was given the power in 1956 to vary the

CRR between 2 to 8 percent of time deposits and
5 to 20 percent of demand deposits
 By an amendment in 1962 the CRR may vary
between 3 to 15 percent of total demand & time
liabilities
 In addition to this, the RBI may direct scheduled
banks to deposit with it a certain percentage of
any increase in deposits that takes place from a
specified date
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Summary

 This cash reserve ratio controls the credit position

in the country
 In the inflationary condition the CRR is increased
to control the flow of money
 Contrary to this, the CRR is reduced in
depression

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Frequently Asked Questions

1. Explain how CRR is used by Reserve Bank of

India to control the credit?

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