Why did the Narasimham Committee recommend lowering the Cash Reserve Ratio (CRR)?

The Cash Reserve Ratio (CRR) is a percentage of deposits that banks are required to maintain with the central bank (in India's case, the Reserve Bank of India or RBI). It is one of the tools used by the central bank to regulate the money supply in the economy and manage liquidity.

The Narasimham Committee was a committee set up by the Government of India in 1991 to review and recommend reforms in the financial sector. The committee was headed by M. Narasimham, a former governor of the RBI.

The committee made several recommendations regarding the CRR, including:

Lowering the CRR: The committee recommended reducing the CRR from 15% to around 6%. The rationale behind this recommendation was that a lower CRR would release more funds for lending, increase the credit-deposit ratio of banks, and help stimulate economic growth.

Linking the CRR to the statutory liquidity ratio (SLR): The committee recommended linking the CRR to the statutory liquidity ratio (SLR), which is the percentage of deposits that banks are required to maintain in the form of liquid assets such as cash, gold, and approved securities. This would allow the central bank to use both tools (CRR and SLR) to regulate liquidity and manage the money supply in a more flexible and targeted manner.

Aligning the CRR with international best practices: The committee also recommended aligning the CRR with international best practices, as India's CRR was higher compared to other countries. This would improve the efficiency and competitiveness of the financial sector and encourage foreign investment.

Overall, the recommendations of the Narasimham Committee regarding the CRR were aimed at increasing the flow of credit to the productive sectors of the economy, promoting financial sector efficiency, and aligning India's monetary policy framework with international best practices.