There are many kinds of instruments used by RBI to control liquidity as well as interest rates in the economy. Cash reserve ratio (CRR), statutory liquidity ratio (SLR), repo and reverse repo rates are some of these tools. Liquidity refers to that form of money which can be immediately spent in the market. Cash, cheque, money kept in bank accounts are called liquid money.

The recent hike in deposit rates has been due to increase in Cash Reserve Ratio (CRR) by RBI.

CRR: CRR refers to the percentage of the total amount of deposits received by banks that they need to keep with RBI.

Increase in CRR is a restrictive measure adopted by RBI whenever it feels that the amount of liquidity in the economy has increased. This is a measure to reduce the inflation in the economy.

Presently, India is going through a phase of increased inflation. This is why, as a signal to the banks to tighten interest rates, the RBI raised the CRR by 75 basis points or 0.75 percentage points. The current CRR is set at 5.75%. The Reserve Bank has aimed to suck out excess liquidity worth Rs. 36,000 crore from the system through this step.

With increase in CRR, banks need to deposit a larger amount of their deposits with RBI than they earlier used to. Thus the deposit (capital) available with them is decreasing. So, in order to maintain more capital, they are inviting more customers to deposit more and more money with them. Increased deposit rates are a method to attract more customers to banks. Thus banks have increased deposit rates.