Cash Reserve Requirement (CRR)
RBI could prevents the rupees that it has injected into banks through foreign exchange purchase from entering into the circulation by raising Cash Reserve Ratio.
CRR is a certain percentage of cash that all Scheduled Commercial Banks are at present required to maintain with Reserve Bank of India. This amount is calculated based on Net Demand and Time Liabilities (NDTL). As on July, 2019, Cash Reserve Ratio (CRR) is set at 4.00 percent of NDTL.
The problem with this tool is that it has a blanket impact on all banks irrespective of their liquidity position. Hence, when compared to reverse repos/OMOs in their ability to withdraw surplus liquidity, raising CRR is not a very comfortable or attractive option.
Also, funds under CRR does not yield any returns for banks, the returns forgone impacts the banking system has a kind of “tax”.
CRR also works in favour of financial intermediaries that are not required to maintain balances with the Reserve Bank. Only SCBs are required to maintain CRR.