Cash Reserve Ratio: Meanings, Objectives & More

CRR is an important ratio that controls the economy and manages the flow of money in the market. It influences the availability of loans and indirectly controls the rate at which we avail loans. 

For those wondering “what is cash reserve ratio”, here’s a simple explanation. Read more to understand CRR, its importance, and how it impacts the growth of our country. 

What Is CRR In Banking?

CRR stands for Cash Reserve Ratio

CRR is the mandatory percentage of resources that banks must maintain as liquid cash. It allows banks to operate risk-free.

CRR is decided by the RBI and the banks must hold the resources as stated to ensure seamless credit operations. The bank cannot use this money for lending or investing and does not receive interest from the RBI. 

What Is The Current Cash Reserve Ratio?

The current cash reserve ratio rate is 4.5% effective since 21 May, 2022.

The RBI changes the CRR at regular intervals depending on the flow of money, and inflation. 

What Is Cash Reserve Ratio Formula?

RBI doesn’t use any specific formula to calculate the CRR. Instead, the CRR rate depends on Net Demand and Time Liabilities(NDTL).

A bank's Cash Reserve Ratio (CRR) is determined by its net demand and time liabilities (NDTL).

The total amount of deposits made by customers like you less the amount the bank has invested in other banks is known as the bank's Net Demand and Time Liabilities (NDTL), which represents the amount of money the bank has available for lending.

To elaborate, if the NDTL of a bank is Rs. 100, then the bank must hold Rs. 4.5 as a cash reserve with the RBI. 

How Does CRR Influence the Economy?

CRR plays a central role in the RBI's monetary policy, controlling the country's money supply, inflation, and liquidity. The RBI uses the CRR to drain excess money from the system.

If the RBI decides to raise the CRR, the amount available to banks for disbursement decreases. The higher the CRR, the less liquidity there is with the banks, and vice versa.  Consequently, the economy experiences a decrease in money supply and a slowdown in investment. This contributes to lowering inflation.

On the other hand, banks will be required to retain a lower percentage of their deposits with the central bank if the RBI lowers the CRR ratio. This raises the total amount of money available for lending. As a result, there is more money accessible in the economy, which promotes economic growth.

The CRR's goal is to ensure that banks maintain an adequate amount of liquidity against liabilities in order to avoid running out of liquidity in the event of excessive demand for funds.

Conclusion

The Cash Reserve ratio or CRR is a crucial instrument of monetary policy that central banks employ to control the amount of money in an economy. CRR is a percentage of the total deposits that banks are required to keep with the RBI. The higher the percentage, the less money banks are able to make loans, which leads to a slowdown in economic growth. 

Conversely, when the CRR percentage is low, banks have more money to spare for lending, increasing the flow of money in the economy. In India, RBI relies heavily on CRR to regulate the money supply in the economy, rein in inflation, and maintain financial stability. 

Cash Reserve Ratio - Related FAQs

There is no upper limit on CRR. The RBI decides the CRR rate depending on the flow of money.

Raising the CRR decreases the money supply, drives up interest rates on auto, housing, and other loans, and boosts interbank money demand, which lowers inflation.

The cash reserve ratio defines how banks can help stabilize prices by limiting the amount of money they can lend, thereby reducing excess liquidity and general demand.

The rate of CRR depends on the Net demand and Time Liabilities(NDTL).

A specific portion of the total amount of deposits made by banks with the central bank must be kept in cash reserves. NDTL is the total amount of money a bank has in its current account, savings account, and fixed deposit accounts.

CRR is changed regularly to 

  • Control inflation
  • Improve economy
  • Maintain financial stability
  • Manage liquidity

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