What is the full form of CRR ?

What is CRR?

Cash Reserve Ratio (CRR) is a monetary tool used by the Central Bank of the Country in order to control money supply in the country's economy. This is considered an important macroeconomic tool used to control macro economic factors such as Inflation in the country. It represents the amount of commercial banks retained with the central bank as a security.

Cash Reserve Ratio (CRR) is a critical economic tool used by the central bank of a country to control macro economic factors of a country. CRR represents a ratio of cash which a commercial bank is required to deposit at the central bank of the country against the total cash commercial bank carries. In this article, we will explore the basics of CRR, how it is used by central banks to control the money supply, and the impact of CRR on the economy.

It is declared by the central bank from time to time in the form of the percentage of total cash commercial banks carry. The CRR is set by the central bank and applies to all commercial banks operating within the country.

How is the CRR calculated?

The calculation is done by taking the total deposits of commercial banks and multiplying it by the CRR rate set by the central bank.

For example, if the CRR rate is 4% and the total deposits of commercial banks is $100 billion, the required CRR would be $4 billion ($100 billion x 0.04 = $4 billion). This means that commercial banks would be required to hold $4 billion in reserves with the central bank, and the remaining $96 billion would be available for lending or other activities.

CRR can be calculated on the basis of the net demand and time liabilities (NDTL) which is the sum of all the liabilities that the bank has to pay on demand or within a year. The CRR is then calculated as a percentage of the NDTL.

Importance of CRR

Here are some of the key reasons why CRR is important

• Control inflation − CRR is a monetary policy tool that is used to control inflation by affecting the amount of funds that commercial banks have available for lending.

• Increase bank's liquidity − By holding a portion of their deposits as reserves with the central bank, commercial banks are required to maintain a minimum level of liquidity.

• Regulate money supply − CRR is an effective tool to regulate the money supply in the economy by controlling the amount of funds that commercial banks have available for lending.

• Impact on the Interest rate − CRR affects the liquidity of banks, and thus it affects the interest rate in the economy.

• Maintaining the financial stability − CRR helps to maintain the financial stability in the economy by ensuring that commercial banks have the necessary funds to meet their obligations and continue lending in times of economic stress.

Advantage of CRR

There are several advantages of using CRR as a monetary policy tool

• Control inflation − CRR is an effective tool to control inflation by affecting the amount of funds that commercial banks have available for lending.

• Increase bank's liquidity − By holding a portion of their deposits as reserves with the central bank, commercial banks are required to maintain a minimum level of liquidity.

• Regulate money supply − CRR is an effective tool to regulate the money supply in the economy by controlling the amount of funds that commercial banks have available for lending.

• Low-cost tool − CRR is a low-cost tool for the central bank to control the money supply.

• Flexibility − CRR is a flexible tool that can be adjusted quickly in response to changing economic conditions.

Effects of CRR

The effects of CRR can be seen on the economy, commercial banks, and individuals. Here are some of the key effects of CRR

• Money supply − CRR affects the money supply in the economy by controlling the amount of funds that commercial banks have available for lending.

• Interest rate − CRR affects the liquidity of banks, and thus it affects the interest rate in the economy.

• Bank's profitability − CRR affects the bank's profitability as the bank has to keep a portion of their deposits as reserves with the central bank, and they are not able to lend or use this money for any other purpose.

• Credit availability − CRR affects the credit availability as when the CRR is increased, the bank's liquidity decreases, and the bank has less money to lend which reduces the credit availability.

• Consumer borrowing − CRR affects the consumer borrowing as when the interest rate increases, the cost of borrowing increases which can make borrowing less attractive for consumers and businesses.

Conclusion

In conclusion, the Cash Reserve Ratio (CRR) is a security which is required to be deposited by a commercial bank. It represents the share of a bank's total deposits that is mandated by the RBI (in India) to be maintained by commercial banks at RBI in a form of liquid cash. This measure is used to control money supply in the economy.

FAQs

Q1. How is CRR different from SLR?

Ans. SLR stands for Statutory Liquidity Ratio, it represents the portion of liquid assets as come to time and demand liabilities.

Q2. What is repo full form?

Ans.Repo means Repurchasing Option Rate, it is also known as Repurchasing Agreement.

Q3. Who is MSF rate?

Ans. MSF rate stands for Marginal Standing Facility Rate. It is a window for the commercial bank to borrow from RBI in case of an emergent requirement of cash.