What is Cash Reserve Ratio (CRR) ?

Definition: 

  • 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 of India. 
  • 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.