Latest Post

HomeBusinesswhat is cash reserve ratio

what is cash reserve ratio

The cash reserve ratio (CRR), which commercial banks must maintain as reserves either in cash or as deposits with the central bank, is a set minimum percentage of the total deposits of clients. The CRR is determined in accordance with the policies of the nation’s central bank.

The sum designated as the CRR is kept in cash and cash equivalents and is either parked with the Reserve Bank of India or kept in bank vaults. The goal is to prevent banks from running out of money while trying to fulfil depositors’ payment obligations. CRR is an essential tool for monetary policy and is used to manage the amount of money in an economy.

The central bank has more control over the money supply thanks to CRR specifications. Commercial banks are merely required to hold a certain amount of the total deposits as reserves. Fractional reserve banking is what this is.

A bank is required to keep a certain amount of its total deposits as liquid cash, known as the cash reserve ratio (CRR). The cash reserve is held by the RBI, and this is an RBI requirement. A bank cannot use the liquid cash it maintains with the RBI for lending or investing reasons, nor does it get interest on it.

The Reserve Bank of India (RBI) determines the CRR, which is a tool for monetary policy used to regulate the amount of money in the economy. Banks must retain a larger percentage of their deposits in reserve when the CRR is raised, which lowers the amount of money available for lending. This might result in less credit being available, which would slow down economic expansion.

On the other hand, when the CRR falls, banks have more money to lend, which can result in a rise in credit availability and economic expansion.

In order to make sure that banks have enough liquid assets to fulfil their responsibilities to depositors, the CRR is also utilised. A bank can borrow money from the RBI if it runs out of cash, but only up to a particular amount. The CRR aids in ensuring that banks consistently have access to sufficient funds to meet their responsibilities.

India’s current CRR is 4.5 percent. As a result, banks are required to keep 4.5% of their total deposits in cash at the RBI.

A potent tool for influencing the money supply and economic expansion is the CRR. However, because the CRR might sometimes have unforeseen repercussions, it is crucial to employ it wisely.

The following are a few CRR effects:

Economic development may slow down if CRR levels rise. This is because businesses have less money to invest in and expand when banks have less money available to lend.

Economic growth can increase when CRR values decline. This is so that businesses have more money to invest in and expand when banks have more money available to lend.

CRR can aid in financial system stabilisation. This is due to the fact that banks are less likely to fail when required to retain a particular amount of cash.

CRR can aid in deterring inflation. This is because banks are less willing to lend to companies that are likely to invest in initiatives that would raise inflation when they have less money available to lend.

Describe CRR.
CRR is a quotient of all deposits that a bank is required to hold in cash. This is a prerequisite established by a nation’s central bank. Typically, the quantity of CRR is represented as a percentage, like 3% or 5%.

Why is CRR crucial?
CRR is significant for several reasons. In the first place, it assists in ensuring that banks have adequate cash on hand to meet their depositors’ needs. Second, CRR can be used to regulate an economy’s money supply. The central bank can make it harder or easier for banks to lend money by raising or lowering the CRR. Both economic expansion and inflation may be significantly impacted by this.

How does CRR function?
A fixed portion of each deposit that a bank receives must be kept in cash at all times. Lenders can extend loans to borrowers with the balance. For instance, if a bank has a CRR of 3%, it must hold $3 in cash for every $100 deposited and can lend out $97.

What consequences does CRR have?
Depending on the unique features of an economy, CRR’s effects can vary. However, a rise in CRR will typically result in less money being available for lending, which might impede economic expansion. A lower CRR will typically result in more money being available for lending, which can spur economic expansion.

Here are some instances of how CRR can be used to limit the amount of money in circulation:

To combat inflation: The central bank may raise the CRR if it is worried about inflation. Banks will find it harder to lend money as a result, which will lead to less money in circulation. This may aid in reducing inflation.

To promote economic growth: The central bank may lower the CRR if it is worried about the state of the economy. Banks will find it simpler to lend money as a result, which will result in more money being in circulation. This might encourage economic expansion.