Cash Reserve Ratio (CRR) - dymystified

Cash Reserve Ratio (CRR)

Contributed by - Arihant Bhandawat

What is Cash Reserve Ratio (CRR)?

It is the percentage of total deposits (both time and demand deposits) that commercial banks need to keep with the Central Bank of any country.  In India the CRR rate as on 30.10.2012 was 4.5% (w.e.f 22.09.2012). These rates are subject to regular changes as per Reserve Bank of India's notifications.

What is the purpose of Cash Reserve Ratio (CRR)?

Cash Reserve Ratio (CRR) began with the purpose for providing following policy support:

1. Providing safety net to both time and demand deposit holders' money kept with commercial banks.
2. Source of liquidity and fund transfers in the financial sector of any country.
3. Providing platform that aids in inter-bank transactions.
4. Providing financial stability to the financial sector.
5. CRR is also used as an important policy tool to control inflation, interest rates and availability of credit facilities and money supply in the economy. It, therefore, provides Reserve Bank of India (or any other Central Bank) an important Monetary Policy tool to boost investments and business sentiments in the country.

How is CRR used to boost investments and business sentiments in the economy?

Since the CRR forms that part of the total deposits in the country's banking system which commercial banks have to compulsorily keep with the RBI, this money is consequently unavailable for distribution and circulation in the economy. When RBI feels that the economy needs boost in terms fresh credit liquidity it generally reduces CRR rate. While in times of run-away inflation which is fueled by easy and excess credit the RBI might raise CRR to suck out excess money from banking system and raise rate of interest which squeezes credit-offtake and tames inflation?

When does RBI reduce CRR rate ?

RBI reduces CRR rate when investments and growth rate in the economy slow down, possibly on account of reduced availability of credit. The RBI reduces the rate to boost investment and growth rate.

CRR - when is CRR rate reduced?

When does RBI increase CRR rate ?

RBI increases CRR rate when inflation runs out of control, possibly on account of increased and easy availability of credit. The RBI increases the CRR rate to contain consumption and tame inflation.

CRR - When is CRR rate increased?

 How does the CRR rate impact different set of people in economy?

CRR - Impact of CRR on economy

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