In July 2008, the Reserve Bank of India raised the Cash Reserve Ratio to 9 per cent — forcing every scheduled commercial bank to park nine rupees out of every hundred in deposits with the RBI, earning nothing. The notification increasing CRR by 25 basis points (since withdrawn) cited "a review of the current liquidity situation" as justification, but the real target was inflation that had breached 11 per cent. Within months, the global financial crisis arrived, and the RBI reversed course — slashing CRR back to 5 per cent in a series of emergency cuts to flood the banking system with liquidity. That whiplash illustrates exactly what SLR and CRR are: not abstract ratios on a compliance checklist, but the primary levers through which the central bank controls how much of your deposit a bank can actually use.
Why does the RBI force banks to hold government securities?
The Statutory Liquidity Ratio requires every bank to hold a minimum percentage of its net demand and time liabilities (NDTL) in liquid assets — government securities, cash, and gold. The current SLR stands at 18 per cent of NDTL, consolidated under the Reserve Bank of India (Commercial Banks -- Cash Reserve Ratio and Statutory Liquidity Ratio) Directions, 2025. The legal authority flows from Section 24 of the Banking Regulation Act, 1949, which empowers the RBI to specify the minimum proportion of assets banks must maintain. Why this matters: SLR serves two masters simultaneously. It creates a captive market for government debt — banks must buy G-Secs whether or not they want to — and it builds a liquidity buffer that protects depositors if a bank faces a run.
The historical trajectory tells the story of India's financial liberalisation. In 1990, SLR stood at 38.5 per cent — meaning more than a third of every deposit rupee was locked into government paper before a bank could consider lending it. The Narasimham Committee on Banking Reforms recommended a phased reduction, and the journey from 38.5 per cent to today's 18 per cent took over two decades. Each cut freed billions in lendable resources, but also reduced the government's guaranteed funding pool. Why SLR cannot go to zero: the government still needs banks to absorb sovereign issuances, and the prudential buffer rationale — that banks should hold genuinely liquid assets against deposit liabilities — remains as valid today as it was in 1949.
"The prescription of a statutory liquidity ratio, which is a variant of the secondary reserve requirement in several countries, is maintained in the form of specified assets such as cash, gold and 'approved' and unencumbered securities — the latter being explicitly prescribed — as a proportion to net demand and time liabilities." — Dr. Rakesh Mohan, Deputy Governor, RBI, Monetary Policy Transmission in India, April 2007
What does parking cash with the RBI actually accomplish?
The Cash Reserve Ratio operates differently from SLR. Where SLR lets banks hold interest-bearing government securities, CRR requires banks to deposit a percentage of their NDTL with the Reserve Bank in cash — earning zero interest. The current CRR is 4 per cent, restored to that level in December 2024 when Governor Sanjay Malhotra announced a 50 basis point cut in two tranches of 25 basis points each.
"It has now been decided to reduce the cash reserve ratio of all banks to 4.0 per cent of net demand and time liabilities in two equal tranches of 25 bps each... This reduction in the CRR would release primary liquidity of about 1.16 lakh crore to the banking system." — Governor's Statement, December 6, 2024
Why the RBI uses CRR rather than just adjusting interest rates: CRR is a blunt instrument that works immediately and mechanically. When the RBI raises CRR, banks must physically transfer cash to the central bank — there is no discretion, no transmission lag, no question of whether banks will "pass on" the tightening. The Deputy Governor's 2007 speech noted that CRR had been brought down from a peak of 15 per cent in 1994-95 to 4.5 per cent by June 2003, reflecting the broader shift from direct to indirect monetary instruments. But the 2008 spike back to 9 per cent proved the RBI will not hesitate to use this blunt tool when inflation demands it. Why CRR remains at zero interest: paying interest on CRR would defeat its purpose. The cost of maintaining CRR — the opportunity cost of funds earning nothing — is itself a form of monetary tightening. Banks factor this cost into their lending rates, which is precisely the point.
In August 2023, the RBI went further and introduced an Incremental Cash Reserve Ratio of 10 per cent on the increase in NDTL between May and July 2023 — a one-off measure to absorb the liquidity surge created by the return of Rs 2,000 denomination notes. The I-CRR was discontinued within weeks, but it demonstrated that the RBI treats CRR as a precision tool when circumstances demand it.
How does the overnight rate corridor actually work?
SLR and CRR are structural tools — they change infrequently and set the outer boundaries of a bank's balance sheet. The day-to-day management of liquidity happens through the Liquidity Adjustment Facility, introduced in June 2000 following the Narasimham Committee II recommendations. The LAF creates a corridor of overnight rates within which money market rates are expected to move.
As of February 2026, the corridor has three components. The MPC resolution of February 4-6, 2026 sets them out: the policy repo rate at 5.25 per cent (the rate at which banks borrow overnight from the RBI against collateral), the Standing Deposit Facility rate at 5.00 per cent (the floor — the rate at which banks park excess cash with the RBI), and the Marginal Standing Facility rate at 5.50 per cent (the ceiling — the emergency borrowing window). Why a corridor rather than a single rate: because banks need both a place to park surplus funds and a source of emergency liquidity. The 25-basis-point spread on each side of the repo rate gives the RBI control over short-term rates without having to intervene in every transaction.
The chain runs: SDF rate (5.00%) sets the floor, because no bank will lend in the overnight market below what the RBI pays. Repo rate (5.25%) is the policy anchor. MSF rate (5.50%) sets the ceiling, because no bank will borrow from another bank above what the RBI charges on emergency funding. Why this matters for lending rates: the entire structure of bank lending rates — from MCLR to external benchmark rates — ultimately traces back to this corridor. When the MPC changes the repo rate, the SDF and MSF rates move automatically, and every external-benchmark-linked loan in the country reprices.
Why was MSF created as a separate emergency window?
The Marginal Standing Facility was introduced on May 9, 2011 as a safety valve. Banks facing temporary liquidity shortfalls could borrow overnight from the RBI at a rate 100 basis points above the repo rate (later narrowed to 25 basis points), and — critically — they could dip below their SLR requirement to do so. The original scheme permitted banks to borrow up to one per cent of their NDTL against SLR securities, even if it meant their SLR holdings temporarily fell below the statutory 18 per cent.
Why MSF changed the game: before its introduction, a bank facing an overnight shortfall had two options — borrow in the interbank call money market (where rates could spike to punitive levels) or face a technical SLR default. MSF created a third path: borrow from the RBI at a known, predictable penalty rate. The December 2011 revision expanded access to excess SLR holdings, and the facility became a permanent feature of the liquidity framework. During COVID-19, the RBI temporarily relaxed the MSF-SLR dispensation before returning to normal operations in December 2021, showing how the emergency window itself can be widened during system-wide stress.
How much of each deposit rupee can a bank actually lend?
This is the question that ties every instrument together. Start with Rs 100 in deposits. The bank must set aside Rs 4 as CRR (parked with the RBI, earning nothing). Of the remaining Rs 96, it must hold at least Rs 18 worth of SLR-eligible assets — primarily government securities. That leaves Rs 78 theoretically available for lending. But in practice, banks hold SLR securities well above the minimum — typically 28-30 per cent of NDTL — because G-Secs serve as collateral for LAF repo borrowing, qualify as High Quality Liquid Assets under the Liquidity Coverage Ratio framework, and can be pledged for MSF borrowing in emergencies.
The amendment chain from structural ratios to overnight operations runs: Section 42 of the RBI Act (CRR power) and Section 24 of the BR Act (SLR power) establish the outer boundaries. The consolidated CRR and SLR Directions of 2025 set the current percentages. The LAF scheme, first operationalised in June 2000, creates the daily adjustment mechanism. And the MPC, meeting six times a year, decides where the repo rate sits within the corridor — a decision that cascades through the interest rate chain from repo to your savings account.
"The MPC voted unanimously to keep the policy repo rate under the liquidity adjustment facility unchanged at 5.25 per cent. Consequently, the standing deposit facility rate remains at 5.00 per cent and the marginal standing facility rate and the Bank Rate remains at 5.50 per cent." — MPC Resolution, February 2026
Why the interaction between SLR, CRR, and LAF matters more than any single ratio: a CRR cut of 50 basis points released Rs 1.16 lakh crore in December 2024 — liquidity that flowed into the overnight market and pushed call rates toward the SDF floor. An SLR cut would free capital for lending but reduce the stock of collateral available for LAF operations. And every repo rate change by the MPC ripples through external benchmark lending rates within days. The three instruments are not separate policies. They are a single, interconnected framework that determines how India's Rs 200-lakh-crore banking system allocates every deposit rupee between government funding, central bank reserves, and private credit.
For the full regulatory timeline of government securities and market infrastructure, see Government Securities & Money Market: Complete Timeline.
Last updated: April 2026