CRR means Cash Reserve Ratio. Banks in India are required to hold a certain
proportion of their deposits in the form of
cash. However, actually
Banks don’t hold these as cash with
themselves, but deposit such case with Reserve Bank of India (RBI) / currency
chests, which is considered as equivalent
to holding cash with RBI. This minimum ratio (that is the part of the total
deposits to be held as cash) is
stipulated by the
RBI and is known as the CRR or Cash Reserve Ratio.
Thus, When a bank’s deposits increase by Rs100, and if the
cash reserve ratio is 6%, the banks will have to hold additional Rs 6 with RBI and Bank will be able to use only Rs 94
for investments and lending / credit purpose.
Therefore, higher
the ratio (i.e. CRR), the lower is the
amount that banks will be able to use
for lending and investment. This power
of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a
central bank through which it can control the amount that banks lend.
