Question

What do you understand by Cash Reserve Ratio?

Hint:

An increase in CRR reduces the money supply, while a decrease in CRR increases the money supply in the economy.

Answer 1

Cash Reserve Ratio (CRR) is the percentage of a bank's total deposits that it must keep in reserve with the central bank. It is a regulatory requirement set by the central bank to ensure liquidity and stability in the banking system. By adjusting CRR, the central bank influences the lending capacity of commercial banks, thereby regulating money supply and controlling inflation. A higher CRR restricts banks from lending more, reducing liquidity, while a lower CRR allows more lending, increasing liquidity in the economy. CRR is an important tool of monetary policy used to maintain financial discipline and stability.