Glossary term
Cash Reserve Ratio (CRR): Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
The cash reserve ratio (CRR) is the percentage of a bank’s net demand and time liabilities, broadly its deposits, that it must keep as cash with the Reserve Bank of India. Banks earn no interest on it and cannot lend it. Raising the CRR reduces the funds banks can lend.
In more detail
The CRR directly limits how much banks can lend, so it affects the money supply. If banks must hold more cash, each rupee of reserves supports less lending and the money multiplier falls. A lower CRR releases funds into the banking system. Because it works on all banks at once, it is a powerful but blunt instrument, and the RBI uses it sparingly.
Example
If the CRR is 4 per cent, a bank with deposits of ₹1,000 crore must keep ₹40 crore with the RBI and may lend from the rest.
Key points
- A quantitative tool of monetary policy.
- A higher CRR shrinks the money multiplier.
- It also protects depositors by ensuring some cash is always held.
Common mistake
Thinking the CRR is a tax. Banks keep ownership of the cash; it just stays idle.
Related terms
Statutory liquidity ratioMoney multiplier
Where it is explained
This term is explained in Class 12 Macroeconomics Chapter 3: Money and Banking.