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Document Type

Case Study

Case Series

Reserve Requirements

JEL Codes

G01, G28

Abstract

As international funding sources dried up during the Global Financial Crisis of 2007–2009 (GFC), businesses in India sought funds from domestic financial institutions, straining banks and lifting short-term lending rates. The liquidity pressure, coupled with sharp asset price corrections and rupee depreciation, restricted credit expansion in India. The Reserve Bank of India (RBI) responded with a suite of liquidity measures, including cuts to its two reserve requirement ratios, the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). The RBI cut the CRR over the course of four months from October 2008 to January 2009, lowering the ratio from 9% to 5%. It cut the SLR once, from 25% to 24%, in November 2008. The RBI’s CRR and SLR cuts applied to most commercial banks and certain cooperatives and regional banks. The RBI did not remunerate CRR reserves, and it did not apply different ratios to different liabilities. The cuts released USD 32.7 billion into India’s financial system. The RBI raised the SLR to its pre-crisis levels in October 2009 and began raising the CRR again in March 2010. The International Monetary Fund said the cuts were “quick,” “fully warranted,” and led to looser credit conditions in India, in combination with other liquidity measures.

Date Revised

2022-12-22

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