CRR or cash reserve ratio is the share of bank deposits that banks must hold as cash with the Reserve Bank of India. A bank can only lend the remaining amount as loans.

A cut in the CRR means a lower portion of deposits is held with the RBI. It frees up a larger portion of deposits to be lent by the banks and this, in turn, increases liquidity.

The 0.5% CRR cut announced on 24 January has released about `32,000 crore for lending, given the deposit base of Rs 64 lakh crore with the banking system.

A change in CRR does not have a direct impact on borrowing rates. However, it can indirectly reduce the borrowing cost since there is a high availability of funds with banks.

Banks may reduce interest rates on loans, depending on the credit growth and rate of growth of deposits. If demand for loans is high, a CRR cut in itself may not reduce the interest rate on loans.

The interest rate offered on deposits may come down when the CRR is reduced if the banks' need for funds is not too high. Banks reduce deposit rates in case of a slowdown in demand for loans.