Credit deposit ratio or CDR is the ratio of how much a bank lends out of the deposits it has mobilized. CDR indicates how much of a bank's core funds are being used for lending, the main banking activity. A higher ratio indicates more funds in the form of deposits raised are being extended as credit and vice-versa.

The regulator does not stipulate a minimum or maximum level for the ratio. CDR helps in assessing a bank's financial health. A very low ratio indicates banks are not making full use of their resources. Similarly, if the ratio is above a certain level, it indicates a pressure on resources.

As per data released by the RBI (for the fortnight ended 11 November), the CDR for the banking sector as a whole dropped 155 bps to 72.7%, the lowest in six years.

The sharp fall in the ratio was on the back of a jump in the denominator, or a sharp increase in deposits with the banking system, which negated a fall in the credit outgo. During the fortnight under review, total deposits with banks rose by Rs 1.3 lakh crore, or 1.3%, whereas bank credit declined 0.8% to Rs 73.53 lakh crore. The cash in hand with banks rose nearly 275% from the end of the previous fortnight to Rs 2.47 lakh crore, the highest in at least seven years.

The money parked by banks with the RBI through reverse repo operations under the central bank's liquidity adjustment facility hit a record high of Rs 4.3 lakh crore as on November 22.

Not to mention, the fortnight included November 10 and 11, the first two working days after the demonetization of Rs 500 and Rs 1,000 currency notes was announced, triggering a deluge of inflows into bank deposits.

Banks have been unable to ramp up lending in the absence of investments by the private sector. Given that the economic recovery has still not taken full hold, the impact of this demonetization and the temporary uncertainty that may be created by implementation of the GST (Goods and Services Tax) starting in April 2017 could delay the private corporate capex recovery.

But, what does the fall in the CDR mean for the economy?

With the announcement of demonetization and the subsequent impact on cash transactions and consumption, inflation is expected to fall. Banks have already started to reduce their deposit rates. Lending rates are expected to fall as well. Due to the expected fall in inflation, the RBI may undertake more cuts in the repo rate.

Reduction in interest rates aid in boosting credit demand translating into better CDR ratios for banks. This in turn will help restore the derailed economic growth back on track.