📚 PASS Research Analyst Certification Examination Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 5.3 — Introduction to Various Macroeconomic Variables

You are adjusting your quarterly banking sector report when news breaks: the Reserve Bank of India (RBI) has hiked the Cash Reserve Ratio (CRR). As a research analyst, your immediate task is not just to note the change, but to quantify the impact on bank net interest margins (NIMs). The CRR, the portion of deposits banks must keep as cash with the RBI, effectively earns zero interest.

When this ratio rises, banks have less lendable capital, which forces a shift in their cost-of-funds structure and potentially drags down their asset yield projections for the upcoming fiscal year.

While CRR acts as a tool for liquidity absorption, the Statutory Liquidity Ratio (SLR) functions as a prudential safety net. SLR requires banks to maintain a percentage of their Net Demand and Time Liabilities (NDTL) in liquid assets such as government securities, gold, or cash. Unlike CRR, SLR-eligible assets earn interest, which means that fluctuations in SLR requirements directly impact a bank’s treasury income and its ability to deploy capital into more profitable corporate loans.

A sudden hike in SLR forces banks to lock more capital into ‘safe’ government debt, inherently lowering the credit velocity of the entire economy.

For an analyst, these ratios are critical input variables in your ’top-down’ modeling. Consider a private sector bank with a high loan-to-deposit ratio; an increase in CRR or SLR tightens its liquidity buffer, often necessitating a hike in retail deposit rates to attract capital. If the bank cannot pass these costs to borrowers, your earnings estimate for the next two quarters must be revised downward. You must treat these ratios as the ‘floor’ upon which banking sector profitability is built.

In your valuation work, always evaluate how a firm’s business model interacts with these mandates. For example, a bank with a high proportion of current and savings account (CASA) deposits is more resilient to shifts in these ratios than a wholesale-funded bank. By monitoring the RBI’s liquidity stance, you anticipate potential credit supply crunches before they appear in the headline loan growth figures. This analytical foresight separates the professional researcher from the amateur who simply reads the balance sheet at face value. 1 2

Nuance

⚠️ Nuance
Candidates often confuse the impact of CRR and SLR on bank profitability, assuming both are equally punitive. In reality, SLR allows banks to earn yield on their required reserves via G-Secs, whereas CRR is entirely non-interest-bearing ‘dead’ capital. A rising CRR is a direct tax on the bank’s earning capacity, while a rising SLR is more of a constraint on the bank’s ability to maximize its risk-weighted asset allocation. Always distinguish between a liquidity constraint (CRR) and a capital allocation mandate (SLR) when writing your investment thesis.

Check Your Understanding

Practice Question 1

The RBI increases the CRR by 50 basis points. As an analyst evaluating a commercial bank’s valuation model, which of the following is the most immediate negative impact you must reflect in your projections?

Practice Question 2

Which of the following assets are eligible for inclusion when a bank calculates its Statutory Liquidity Ratio (SLR) requirement?

This is a companion read for Section 5.3 — Introduction to Various Macroeconomic Variables from PASS Research Analyst Certification Examination by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.

  1. NDTL refers to the difference between the sum of demand and time liabilities (deposits) of a bank and the deposits held by the bank with other banks. ↩︎

  2. CRR is maintained in cash form with the RBI, whereas SLR assets are maintained by the banks themselves, primarily in the form of G-Secs. ↩︎