Cash Reserve Ratio is a major monetary policy tool that is decided by the RBI's monetary policy committee. The committee revises the CRR in the monetary policy review meeting which is conducted every six to eight weeks. CRR is one of the major tools of the RBI to control inflation, money supply, or liquidity in the economy.

What is the Cash Reserve Ratio (Meaning)?

Cash Reserve Ratio is a percentage of total deposits that every bank needs to keep as a reserve with the RBI in the form of cash. This is done to help in facing the situations of cash shortages at the time of heavy withdrawals in the bank. If in the case, banks are facing heavy withdrawals by the depositors and there can be a situation when the banks do not have enough cash with them to meet the withdrawals, so it is mandated by the RBI to maintain a percentage of total deposits or CRR as a cash reserve with the RBI which can be utilized to meet such problems.

How does CRR work?

CRR helps in controlling inflation, money supply, and liquidity in the economy. CRR can help in both increasing and decreasing inflation, money supply, and liquidity in the economy. If the RBI wants to increase the inflation, money supply, and liquidity in the economy, then RBI decreases the CRR which leads to having more cash with the bank and increases the lending power of the banks. And when the banks will lend more money, it will increase the purchasing power of the people which will eventually lead to an increase in inflation, money supply, and liquidity in the economy. And, if the RBI wants to decrease the inflation, money supply, and liquidity in the economy, then RBI will increase the CRR which leads to having less cash with the bank and decreases the lending power of the banks. And when the banks will not be able to lend more money, it will decrease the purchasing power of the people and will lead to a decrease in inflation, money supply, and liquidity in the economy.

Also Read: Cost Inflation Index (CII Index) - Meaning, Calculation, Chart & Example

How is Cash Reserve Ratio calculated?

There is no specified formula to calculate the CRR. CRR is fixed by the RBI monetary policy committee by seeing the economic conditions and the deposits/withdrawals with the banks. 

Currently, CRR is fixed at 3% and it was last updated on 27th March 2020.

The 3% CRR means, for every Rs.1,000 of deposits, banks need to keep the reserve of Rs. 30 with the RBI.

Objectives of Cash Reserve Ratio

• The primary objective of the cash reserve ratio is to have control over the inflation, money supply, and liquidity in the economy.
• CRR is also used as a tool to control the purchasing power of the people in the economy. Like when the purchasing power of the people increases, RBI increase CRR, which leads to control of the purchasing power of the people and vice versa.
• As banks need to keep the part of the total deposits with the RBI, it also ensures the security of the deposits of the people. As, if there is a case when banks are not able to meet withdrawals by the depositors, then, in that case, banks can use this reserved cash which is kept with the RBI.

Difference between Cash Reserve Ratio and Statutory Liquidity Ratio

Frequently Asked Questions on Cash Reserve Ratio

What is CRR?
CRR stands for the cash reserve ratio. It is a monetary tool that is used to maintain inflation rates, control money supply, and liquidity in the economy.

Who decides the rate for the CRR?
CRR rate is fixed by the RBI monetary policy committee.

What is the current rate for Cash Reserve Ratio?
The current rate for the cash reserve ratio is fixed at 3% and it was last updated on 27th March 2020.

Where do the Banks keep the CRR?
The Banks need to maintain a percentage of their deposits in cash with the RBI as per the CRR rates.

What is the objective of CRR?
The primary and main objective of the CRR is to have control over the inflation, liquidity, and money supply in the economy. CRR is also used to have control over the purchasing power of the people. The second objective of CRR is to ensure the safety of the deposits of the people with the bank. As when the banks face a cash crunch, the CRR reserve can be used to control the situation.

How does CRR help in regulating inflation and liquidity in the economy?
When RBI wants to increase the inflation and liquidity in the economy, RBI decreases the CRR, and low CRR will lead the banks to keep less reserve of the deposits and will increase the lending power of the banks. Now, more lending power of the banks will lead to an increase in the money supply in the economy which will further lead to an increase in inflation and liquidity in the economy and vice versa.

Do Banks earn any interest on the reserve kept with the RBI?
No, RBI doesn’t give any interest on the reserve amount to the banks.

Also Read:

What is Expense Ratio in Mutual Funds
Best Mutual Funds to Invest in for Long Term in India
What is Rupee Cost Averaging in SIP?
Index Funds - Meaning, Purpose, How to Work, Risk, Returns
Hedge Funds - Meaning, Features, How are They Different from Mutual Funds
What is Net Asset Value (NAV) - Meaning, Formula, Types of Calculation, Example
Compound Annual Growth Rate (CAGR) - Meaning, Formula, Calculation
What is Sharpe Ratio - Formula, Limitation & Comparison with Information Ratio
Information Ratio: Meaning, Features, Formula, Example