The Cash Reserve Ratio (CRR) is a monetary policy tool used by central banks to regulate the money supply and control inflation. It is the percentage of a bank’s total deposits that it is required to maintain as liquid cash with the central bank.
The CRR is an important tool for the central bank to control inflation. When the central bank raises the CRR, it reduces the amount of money that banks can lend. This can help to control inflation by reducing the amount of money in circulation. When the central bank lowers the CRR, it increases the amount of money that banks can lend. This can help to stimulate the economy by increasing the amount of money in circulation.
In India, the CRR is set by the Reserve Bank of India (RBI). The current CRR in India is 4.5%. This means that banks in India are required to maintain 4.5% of their total deposits as liquid cash with the RBI.
The CRR is a blunt instrument and can have unintended consequences. For example, when the central bank raises the CRR, it can make it more difficult for banks to lend money to businesses and individuals. This can slow down the economy.
The CRR is also a relatively inflexible tool. The central bank cannot change the CRR very often because it can have a significant impact on the economy.
Despite its limitations, the CRR is an important tool for the central bank to control inflation. It is a tool that should be used sparingly and carefully.
Here are some of the effects of CRR on the economy:
- Increase in CRR: When the CRR is increased, banks have to hold more cash reserves with the RBI. This reduces the amount of money that they can lend to businesses and individuals. This can lead to a slowdown in economic activity.
- Decrease in CRR: When the CRR is decreased, banks have more money to lend. This can lead to an increase in economic activity.
- Impact on interest rates: The CRR can also affect interest rates. When the CRR is increased, it can lead to higher interest rates. This is because banks need to earn more money to cover the cost of holding more cash reserves.
- Impact on inflation: The CRR can also affect inflation. When the CRR is increased, it can help to control inflation. This is because it reduces the amount of money in circulation.