UPSC Darpan

EconomyGS310 October 2026

RBI Raises Daily CRR Floor to 99% From 90% to Drain Surplus Liquidity

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The news

Mumbai, October 9. Notification RBI/2026-27/290, under Section 42(1) of the RBI Act, 1934, raises the cash reserve ratio (CRR) balance scheduled banks must hold every day from 90% to 99% of the requirement, from the fortnight beginning October 16. The CRR, now 3%, is the share of deposits parked with the RBI without interest. Banks still meet a fortnightly average, but could so far hold 90% on some days and about 110% on others; that leeway now largely goes, a Jana Small Finance Bank treasury head told ET. ET puts the surplus to be drained at about ₹4 lakh crore; The Hindu (PTI) gives ₹3.88 lakh crore on October 8. Governor Sanjay Malhotra has called raising the CRR rate itself “the least preferred” tool.

The chain in one line: Oil above $100 lifts inflation → MPC raises the repo to 5.50% → a ₹4 lakh crore surplus keeps overnight money cheap → RBI lifts the daily CRR floor to 99% → overnight rates rise toward the repo

Static syllabus linkage

  1. Section 42 of the RBI Act, 1934 makes the CRR a statutory reserve. Every scheduled bank (Second Schedule to the RBI Act) must keep with the RBI an average daily balance equal to the CRR share of its net demand and time liabilities, computed over a fortnight; a shortfall attracts penal interest linked to the Bank Rate. The SLR instead comes from Section 24 of the Banking Regulation Act, 1949.
  2. The Liquidity Adjustment Facility keeps overnight rates in a corridor. The MPC sets the repo; the RBI manages liquidity so the weighted average call rate, the operating target, stays near it. Since April 2022 the floor is the Standing Deposit Facility, which absorbs surplus without collateral; the ceiling is the Marginal Standing Facility.

Why UPSC loves this

  1. GS3 monetary policy is tested through instruments, not just the repo. “Mobilization of resources” covers how policy reaches borrowers; CRR, SLR and the LAF corridor are Prelims staples.

Prelims nuggets

  • The CRR is prescribed under Section 42(1) of the RBI Act, 1934; the RBI pays no interest on it.
  • The CRR is met as a fortnightly average, with a separate daily minimum.
  • The Standing Deposit Facility (April 2022) is the LAF floor and needs no collateral.
  • The weighted average call rate is the operating target of monetary policy.

Analysis

  1. A higher daily floor tightens money without touching the CRR rate. With a 90% floor, a bank could lend spare reserves overnight and top up later; that freedom added to overnight supply and kept call rates below the repo. At 99%, almost every required rupee sits with the RBI daily, so less cash is free and the call rate drifts toward 5.50%.
  2. The RBI chose a reversible tool, as in 2013. A higher CRR rate locks up deposits indefinitely and, a banker told ET, would miss FCNR(B) inflows exempted from CRR. A daily floor targets the swing, not the stock; ET’s sources recall July 2013, when it went from 70% to 99%. Counter-view: on tax-outflow days smaller banks lose their buffer and may hoard idle reserves.
  3. Lens — Short-term relief and long-term reform: draining cash guards the rupee at the cost of dearer credit. Cheap rupee liquidity makes it easy to borrow rupees and buy dollars; the rupee closed at 96.73 after heavy RBI dollar sales, ET reports. Tightening helps the currency but raises borrowing costs. A thoughtful officer would accept it as temporary, if the RBI signals an exit once the surplus is gone.

Possible Mains question

Liquidity management, not the repo rate alone, decides whether monetary tightening reaches borrowers. Examine with reference to the RBI’s recent change in CRR maintenance norms. (15 marks, 250 words)

Model approach

  1. Directive — Examine. Probe how liquidity tools carry the policy rate to the market.
  2. Introduction — a repo hike sat on a ₹4 lakh crore surplus. Define CRR and the daily floor.
  3. Surplus cash keeps the call rate below the repo, so a hike leaks. Draw: CRR floor → less overnight cash → call rate up → lending rates.
  4. Reversible tools beat a CRR-rate hike. Value addition: the July 2013 precedent (70% to 99%).
  5. The squeeze costs small banks. Volatile call rates on tax days.
  6. Conclusion — tighten, then signal the exit. Ease the floor once the surplus is absorbed.

Administrator's brainstorm

As treasurer of a mid-sized public sector bank, how would you manage the 99% daily CRR floor?

I would stop treating the fortnightly average as a cushion and forecast daily cash flows, especially around advance-tax dates. Surplus would go to the Standing Deposit Facility, with a small reserve buffer and MSF access ready, because penal interest and reputational cost outweigh a few basis points of yield.