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Cash reserve ratio

Ajith Jose (Student) (24 Points)

28 January 2016

What are the components of Cash Reserve Ratio? Whether the balance maintained in the current accounts with Private Sector Banks (which are under the second schedule of RBI) can be considered as part of CRR?

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Sathish M (Management Accountant) (40581 Points)
Replied 28 January 2016

Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves with the central bank.

Definition: Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.

Descripttion: The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy.

CRR specifications give greater control to the central bank over money supply. Commercial banks have to hold only some specified part of the total deposits as reserves. This is called fractional reserve banking.

Source:ET