Discussion
RBI pays interest on CRR balances of banks at _____.
Answer: D
Correct answer: Zero %
No interest is paid on cash reserve ratio balances. The Reserve Bank paid interest on them until 2007, when the RBI Act was amended to remove the provision.
The consequence is that CRR is a genuine cost to a bank, not merely a reallocation of its assets - deposits it has paid for sit idle at the central bank. That is exactly what distinguishes it from the statutory liquidity ratio, which may be held in government securities that earn a return. It is also why a change in CRR bites harder on bank margins than a change of the same size in SLR.
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