What is the Full Form of CRR?
CRR stands for Cash Reserve Ratio in its full form.
CRR stands for Cash Reserve Ratio, which is one of the RBI’s most important monetary policy instruments or weapons for controlling inflation and regulating the liquid money supply in the larger economy. The Monetary Policy Committee of the RBI makes the final decision on the Cash Reserve Ratio.
CRR is one of the most useful quantitative and qualitative instruments available to the RBI for managing liquidity. Come learn more about this weapon of quantitative monetary policy.
Purpose of Cash Reserve Ratio
Every Indian bank is required to keep a specific percentage of its demands and time liabilities (NDTL) in liquid cash at the central bank. CRR refers to the particular proportion or share of liquid cash that each bank must deposit with the RBI.
The Cash Reserve Ratio can be changed by the RBI at any moment. They utilized to raise the Cash Reserve Ratio in order to remove excess liquidity from the economy and manage inflation.
How does the Cash Reserve affect the economy?
- CRR is an essential quantitative credit control instrument used by the RBI. It aids in the regulation of liquidity and the control of inflation. The Bank will have less liquid liquidity while the CRR holds up, and vice versa.
- The RBl must ensure that there is no excess money in the economy during inflation. As a result, the central bank raised the CRR to restrict the quantity of available cash for banks, causing excess cash to be pulled from the economy.
- When a bank wishes to increase the flow of liquidity in the economy, it reduces the CRR. This allows banks to lend to the general public for business or investment purposes. Economic growth is boosted by a low CRR. Additionally, CRR has a direct impact on interest rates, which cannot be overlooked.
When did CRR was introduced in the indian economy?
CRR was initially implemented in the Indian economy in 1950 to ensure the security and liquidity of bank deposits. However, as time has passed, the CRR has become one of the RBI’s most important tools for controlling liquidity and inflation. Since 1962, the central bank has also been able to change the CRR law from 3% to 15% of total demand and time deposits.
Objectives of the Cash Reserve Ratio
The Cash Reserve Ratio is a mechanism used by the Reserve Bank of India to help with quantitative credit control. The following are a few of CRR’s most important goals.
- CRR is a type of rate of comparison, it assists the RBI to adjust the base rate. (The lowest lending rate below which a bank is not authorized to loan funds is called the base rate.)
- In addition, the Cash Reserve Ratio is an key monetary policy tool for limiting inflation. The RBI inflates the CRR when inflation is high. As a result, they force commercial banks to keep surplus money in reserves, allowing them to have less money to lend.
- Additionally, CRR ensures that the Reserve Bank of India will guarantee a portion of a bank deposit.
How is CRR Calculated?
The Cash Reserve Ratio is calculated using no specific technical formula. This is calculated as a percentage or share of NDTL.
NDTL stands for Time Liabilities and Net Demand, which is a total of the savings account, current account, and general people’s deposits balances clutched by commercial banks.
The Central Bank of India has set the Cash Reserve Ratio at 4.00% at the moment. This means that, under current regulations, every scheduled commercial bank must keep 4.00 rupees with the RBI for every 100 rupees of NDTL.