The introduction of CRR in 1950 helped establish sound economic principles for the nation's growth strategy.
It plays a crucial role in the financial stability of banks. It has a significant impact on banking operations in India. Therefore, CRR is essential for any growing nation like India!
In this article, we will discuss the full form of CRR, its definition, its implications on liquidity, interest rates, credit availability in India’s banking system, and its significance in banking.
We will also discuss why CRR is important for financial stability and how it affects the money supply in an economy.
Cash Reserve Ratio Meaning:
CRR in India is a banking regulation that requires banks to keep a certain percentage of their deposits in the form of cash with the Reserve Bank of India (RBI). This percentage is known as the CRR.
This cash reserve ratio is set by the Reserve Bank of India (RBI). It helps to regulate the liquidity of money in the economy.
The CRR rate is an important tool used by RBI to control inflation, manage economic growth and ensure financial stability.
It is the percentage of total deposits that banks must keep with the central bank as a reserve. This ratio helps to ensure that banks have adequate cash reserves to meet their withdrawal demands.
It is a must for a bank to make sure the bank does not run out of money when a customer wants his/her money back from the bank.
Every bank has to keep some percentage of its cash with the Central Bank. The amount to be kept with the Reserve Bank of India is decided with the CRR. The bank does not get any interest on the amount deposited with RBI.
It is the number of funds that every scheduled bank has to keep with the rbi. The amount of funds is the percentage that is determined by the rbi from time to time. A higher percentage of CRR leads to higher lending rates.
CRR Stands for:
CRR full form in banking stands for “Cash Reserve Ratio”.
The Reasons Why the Indian Government Implemented a Cash Reserve Ratio
India’s banking sector is one of the most important sectors in the country, and its stability is essential for economic growth.
To ensure that banks remain stable and functioning, the Indian government implemented a Cash Reserve Ratio (CRR).
The purpose of this ratio is to ensure that banks have adequate funds available for day-to-day operations, as well as to protect depositors' money.
How Does Cash Reserve Ratio Work in India?
The CRR rate can be changed by RBI from time to time depending on various economic factors.
Changes in the CRR rate can drastically affect the amount of money available for lending, which can further impact economic growth.
How Does an Increase or Decrease in CRR Affect Banks & Customers?
The changes in the CRR may affect banks, customers and the economy as a whole. Banks will experience a relatively larger impact from change, as they are directly impacted by government policy decisions on interest rate increases/decreases.
The higher the CRR rate, the more money banks have to keep aside and this reduces their lending capacity, thus reducing economic activities. On the other hand, lower CRR rates allow banks to lend more money which boosts economic activities.
Setting a minimum percentage also helps control inflation as it restricts the amount of money available for lending and investment.
Current CRR Rate:
The current CRR rate set by RBI is 4.50%. Banks must keep this amount as cash reserves with RBI, and any excess funds can be used for lending or investing purposes.
How to Use CRR as a Tool to Reduce Inflation & Interest Rates?
The cash reserve ratio (CRR) is a tool to reduce inflation and interest rates in India. In simple terms, if the central bank increases CRR, it will increase interest rates and decrease lending activities by banks. On the other hand, if the central bank decreases CRR, it will decrease both lending and interest rates.
Objectives:
The purpose of this regulation is to ensure that banks have enough liquidity to meet customer demands and maintain financial stability. The primary objectives of CRR are:
- To maintain price stability.
- Promote balanced growth.
- To provide the customers with the funds whenever they want that they have deposited with a certain bank.
- To protect the bank from getting insolvent.
- To maintain liquidity in the market.
How CRR is calculated?
For Example:
If 5 persons go to the bank and deposit their money in it whether in a savings account, current account, FD, demand drafts etc. This all becomes a liability of a bank. Now its total money value is calculated and the CRR percentage is applied to it.
Related Articles: Statutory Liquidity Ratio (SLR Rate)
