Changes in Cash Reserve Requirement in India

The Reserve Bank of India has resorted to the variable reserve requirement as a credit control measure several times during recent years. The rate of statutory cash reserves was raised from 3 percent to 5 percent of demand and time liabilities in June, 1973 and from 5 percent to 7 percent in September, 1973. The higher cash reserve ratio was intended to impound the cash resources of the scheduled banks and to reduce their lending resources. But to enable the banks to meet the essential needs of the next busy season, the cash reserve requirement was reduced to 5% with effect from 29th June, 1974, to 4.5% with effect from 14th December, 1974 and further to 4% with effect from 28th December, 1974. In the context of rising prices and with a view to regulating further the lending resources of commercial banks, the rate of statutory reserve was again raised to 5% with effect from September 4, 1976, and further to 6% with effect from November 13, 1976. The Cash Reserve Ratio was raised to 7% in two phases in 1981 and further to 7.75% but was reduced to 7.25% with effect from April 9, 1982. With a view to improve liquidity of the banking system to support increase in production the CRR was reduced to 7% on June 11, 1982. But to immobilize excess liquidity position with the bank, the CRR was raised three times in 1983 from 7% to 7.5% with effect from 27th May, to 8% on 29th July and to 8.5 % on 27th August. It was raised to 9 percent with effect from 4th February, 1984. During the year 1987, the Cash Reserve Ratio was raised twice from 9 percent to 9.5 percent of net demand and time liabilities with effect from the fortnight beginning February 28, 1987 and from 9.5% to 10% with effect from October 24, 1987. These steps were taken to immobilize a part of the large growth of liquidity of the banking system which had inflationary implication.

In January 1977, the Reserve Bank made effective use of the power to impose additional reserve requirement. Scheduled banks were required to make an additional statutory reserve equal to 10% of the incremental deposits of each bank after January 14, 1977. This requirement continued for more than three and a half years. To enable the banks to use the incremental reserve for credit purposes, Reserve Bank of India exempted the banks from maintaining additional reserves wit effect from 31st October, 1980 but the deposits already immobilized by the Reserve Bank were not permitted to be withdrawn by the banks immediately. Only 20% of such impounded deposits were permitted to be with drawn in two installments on 27th October, and December 1, 1984 and the release of the rest of the amount was postponed several times by the Reserve Bank because of the continued strong of overall liquidity.

Banks were required to maintain CRR on Non-Resident External Rupee (NRE) account deposits at the rate of 3% only. CRR on Foreign Currency (Non-Resident) (FCNR) deposit liabilities was raised from 3% to 9.5% with effect from May 23, 1987 to reduce overall liquidity in the banking system. But these deposits were exempted from 10% incremental CRR.

In November 1983, Reserve Bank of India again asked the scheduled banks to maintain an incremental cash reserve ratio of 10 percent of the increase in net demand and time liabilities over the level as on November 11, 1983. This step was taken in the context of the continued excess liquidity in the banking system and with a view to ensuring a better alignment between the sources and uses of funds without in any way hindering the flow of credit for productive purposes.