What is Cash Reserve Ratio (CRR) ?
- Cash Reserve Ratio (CRR) is a specified minimum
fraction of the total deposits of customers, which commercial banks have to
hold as reserves either in cash or as deposits with the central bank.
- CRR is
set according to the guidelines of the central bank of a country.
- The amount specified as the CRR is held in cash
and cash equivalents, is stored in bank vaults or parked with the Reserve Bank
- The aim here is to ensure that banks do not run out of cash to meet
the payment demands of their depositors.
- It is a crucial monetary policy tool
and is used for controlling money supply in an economy.
- CRR specifications give greater control to the central bank
over money supply.
- Commercial banks have to hold only some specified part of
the total deposits as reserves.
- This is called fractional reserve banking.