CASH RESERVE RATIO ( CRR )

The cash reserve ratio is the portion of the depositor’s balance which must be deposited with the country’s central bank. CRR is another  tool to control the  money supply in a country.The Reserve Bank Of India (RBI) require the Scheduled Commercial Banks are required to maintain a deposit in it’s current account.

Reserve Bank of India (RBI) like any central bank has one of it’s primary function which is to control the cost of credit.The Reserve Bank decides the amount of money that is available for the industry or the economy and the cost of capital is also decided by the bank which is the liquidity and interest rates.The RBI using the various tools such as the SLR, CRR and REPO to control the amount of cash available and the price,the RBI increases or decreases these as per the conditions of the economy.

CRR is used to lock the deposits made with a bank and hence lock that amount away from the economy.These amounts cant be lend out to to corporate or individual borrowers. The CRR is  aimed at ensuring that banks do not run out of cash to meet the withdrawal demands of their depositors . CRR remains in current account and banks don’t earn anything on that amount.

Let’s say that a bank’s deposits increase by Rs. 10 crore, and considering a cash reserve ratio of 6% the bank will have to deposit a additional Rs. 0.6 crore with RBI and will be able to use only Rs. 9.4 crore for investments and lending purpose. Therefore, higher the CRR the lower the amount that banks can lend to it’s customers. Thus RBI can control the liquidity by changing the CRR an increase in the CRR to reduce the  amount lend-able and vice-versa.

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