CRR, also known as Cash Reserve Ratio, refers to the proportion of a bank's total demand and time liabilities (deposits) that it is required to hold as reserves in the form of cash or deposits with the central bank. It is a monetary policy tool used by central banks to control and regulate the money supply and liquidity in the economy.
The Cash Reserve Ratio is set by the central bank and is a mandatory requirement for commercial banks. It is primarily aimed at ensuring the stability and solvency of the banking system, limiting excessive lending and credit creation, and managing inflationary pressures. By regulating the amount of reserves that banks must hold, the central bank effectively controls the amount of money available for lending and investment.
An increase in the CRR means banks are required to set aside a larger portion of their deposits as reserves, thereby reducing the excess funds available for lending purposes. Conversely, a decrease in the CRR results in a higher availability of funds for banks to lend, thus stimulating economic activity.
The Cash Reserve Ratio is an important tool for central banks to influence the liquidity in the financial system, set monetary policy objectives, and manage inflation. By adjusting the CRR, the central bank can encourage or restrict credit growth and contribute to overall economic stability and price stability.
