The full form of CRR is Cash Reserve Ratio.
In the context of banking and finance, the Cash Reserve Ratio (CRR) is a crucial tool used by central banks, like the Reserve Bank of India (RBI), to manage the money supply and control inflation. It represents the percentage of a bank's total deposits that it is required to keep with the central bank in the form of cash reserves.
Here's a breakdown of what the Cash Reserve Ratio entails:
- Definition: CRR is the mandated percentage of a bank's net demand and time liabilities (NDTL) that it must maintain as cash with the central bank. NDTL essentially refers to the deposits a bank holds.
- Purpose: The primary purpose of CRR is to ensure the solvency and liquidity of banks. It also serves as a tool for the central bank to control inflation and regulate the money supply in the economy.
- Mechanism: By adjusting the CRR, the central bank can influence the amount of money available with banks for lending.
- Increasing the CRR: When the central bank increases the CRR, banks are required to hold a larger portion of their deposits as reserves, reducing the amount of money they can lend out. This helps to curb inflation by reducing the money supply in the market.
- Decreasing the CRR: Conversely, when the central bank decreases the CRR, banks are required to hold a smaller portion of their deposits as reserves, increasing the amount of money they can lend out. This can stimulate economic growth by increasing the money supply.
- No Interest Earned: It's important to note that banks do not earn any interest on the money they hold as CRR with the central bank.
Therefore, understanding the Cash Reserve Ratio (CRR) is essential for comprehending the mechanisms that central banks employ to maintain economic stability.
