CASH RESERVE RATIO

CASH RESERVE RATIO

Subject : Economics

Context : 10.5% growth in 2021-22, will raise CRR in two stages, says RBI.

Concept :

CRR

• It is a certain minimum amount of deposit that the commercial banks have to hold as reserves with the central bank.
• The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio.
• The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements.

Primary purposes of the Cash Reserve Ratio

• Since a part of the bank’s deposits is with the Reserve Bank of India, it ensures the security of the amount. It makes it readily available when customers want their deposits back.
• Also, CRR helps in keeping inflation under control.
• At the time of high inflation in the economy, RBI increases the CRR, so that banks need to keep more money in reserves so that they have less money to lend further.