Question

What is "Cash Reserve Ratio"?

Hint:

Do not confuse CRR with SLR (Statutory Liquidity Ratio). CRR is the portion of deposits kept as cash with the central bank. SLR is the portion of deposits that banks must maintain with themselves in the form of liquid assets (like cash, gold, or government securities).

Answer 1

Step 1: Understanding the Concept:
The question asks for the definition of the Cash Reserve Ratio (CRR), a key tool of monetary policy used by a country's central bank.

Step 2: Detailed Explanation:
The Cash Reserve Ratio (CRR) is the minimum percentage of a commercial bank's total deposits (specifically, Net Demand and Time Liabilities or NDTL) that it is required to maintain as cash reserves with the central bank (e.g., the Reserve Bank of India).
Banks do not earn any interest on the money held as CRR with the central bank.
Purpose: CRR is a tool used for credit control. \begin{itemize} \item By increasing the CRR, the central bank reduces the amount of funds available with commercial banks for lending, which helps to control inflation. \item By decreasing the CRR, the central bank increases the funds available for lending, which can stimulate economic growth. \end{itemize}

Step 3: Final Answer:
The Cash Reserve Ratio is the specified minimum fraction of a commercial bank's total deposits that must be kept as a cash deposit with the central bank.