(2020-Mar) CRR during and after Corona

Question 1

What is the CRR?

Answer 1

CRR stands for Cash Reserve Ratio.
It’s the percentage of a bank’s total deposits (Net Demand and Time Liabilities) that must be kept as reserves with the Reserve Bank of India.

Question 2

How did the RBI use the CRR to address the economic impact of COVID-19?

Answer 2

The RBI reduced the CRR from 4% to 3% in March 2020.
This injected extra liquidity (Rs 1.37 trillion) into the banking system.
Goal: Make it easier for banks to lend money and support businesses during the crisis.

Question 3

Describe the timeline of CRR changes during and after the initial COVID-19 period.

Answer 3

March 2020: CRR reduced to 3%
March 2021: CRR increased to 3.5% (start of restoration)
May 2021: CRR increased to 4% (back to pre-pandemic level)

Question 4

Why did the RBI reduce the CRR during the pandemic, and then later restore it?

Answer 4

Reduction: Aimed to boost liquidity and help the economy cope with the COVID-19 shock.
Restoration: Done as economic conditions improved, to ensure banks have appropriate reserves and prevent excess money supply from fueling inflation.