What is the meaning of Cash Reserve Ratio?

Cash Reserve Ratio is a specific amount of funds which the commercial banks have to keep with the Reserve Bank of India to ensure liquidity in the system. The funds are a part of the Net Demand and Time Liabilities (NDTL). A reduction in CRR leads to more liquidity in the system as the banks have to park fewer funds with the Central Bank. This has a direct impact on lending rates banks as it comes down considerably.  Also, under inflationary conditions, a reduction in CRR leads to more money in the system.

CRR gives the Central Bank more control over the money supply in the system although commercial banks have to park only specified part of their total deposits. Latter is also known as fractional reserve banking.


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