What changed
The Reserve Bank of India (Amendment) Bill, 2006 removed the statutory floor of 3% for CRR under Section 42(1) of the RBI Act, 1934. RBI now has full discretion to set CRR without any lower or upper limit. Additionally, interest payment on CRR balances has been discontinued from the fortnight beginning June 24, 2006.
What it means for you
Banks lose the guaranteed 3% CRR floor, giving RBI more flexibility to tighten or ease liquidity as needed. The removal of interest on CRR balances increases the effective cost of maintaining reserves, impacting bank profitability. Lenders must now factor in potential CRR volatility and the higher opportunity cost of idle reserves.
What you must do
- Update internal CRR computation systems to reflect removal of statutory floor and zero interest on balances.
- Monitor RBI announcements closely for future CRR changes, as no floor or ceiling now exists.
- Reassess liquidity management strategies to account for higher cost of CRR maintenance.
- Train treasury and compliance teams on the amended Section 42 provisions.
Who it affects
All scheduled commercial banks (excluding RRBs), Treasury and liquidity management teams, Compliance and regulatory reporting departments
What is the current CRR rate after this amendment?
RBI has maintained status quo, so CRR remains at 5% of total demand and time liabilities, subject to exemptions notified separately.
Will banks receive any interest on CRR balances now?
No. Interest payment on CRR balances has been discontinued from the fortnight beginning June 24, 2006, following the omission of Section 42(1B).
Can RBI change CRR to any level without restriction?
Yes. With the removal of the 3% statutory floor, RBI can now set CRR at any rate, with no floor or ceiling, to ensure monetary stability.