The full form of CRR is Cash Reserve Ratio. The CRR reflects the amount of money that RBI (Reserve Bank of India) banks are required to keep. It is a percentage of the total cash on hand at a bank. CRR fluctuates from one time to the next. The CRR is set by the RBI, and banks are required to keep back a certain percentage of their deposits with the RBI.
The RBI requires banks to keep a percentage of their deposits in cash so that consumers can access them in an emergency. The CRR is the amount of money that must be kept in reserves. Putting the leftover funds in a bank safe or forwarding them to the RBI.
How to Calculate CRR?
- A bank must store 4 % of the total NDTL (Net Demand and Time Liabilities) in cash form when the current CRR rate is 4%.
- The funds cannot be loaned or invested by the bank.
What are the Objectives of CRR?
- Because a portion of the bank’s deposits are with the RBI, the sum is safe. If clients want their money or deposit back, it is immediately available.
- CRR aids in cost management under the track. During periods of significant economic inflation, the RBI boosts the CRR, causing banks to store more money in reserves and have limited liquidity to begin lending.
How Does CRR Influence the Economy?
The Cash Reserve Ratio (CRR) is a key component of the RBI’s financial arrangement, and it is used to regulate the country’s cash supply, degree of expansion, and liquidity. The greater the CRR, the lower the liquidity with the banks, and vice versa. During periods of considerable expansion, efforts are made to slow the flow of money in the economy.
When the RBI needs to syphon assets into the framework, it lowers the CRR, which increases loanable assets with banks. As a result, banks approve a massive amount of credit to organisations and companies for numerous enterprise goals. It also increases the overall cash supply in the economy. This eventually helps the economy’s development rate.
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