Question

What is Cash Reserve Ratio?

• A. Percentage of deposits that a central bank must keep as cash reserves with the bank
• B. Percentage of deposits that a central bank must keep as cash reserves with the government
• C. Percentage of deposits that a bank must keep as cash reserves with any bank
• D. Percentage of deposits that a bank must keep as cash reserves with the central bank

Answer 1

Answer:

D. Percentage of deposits that a bank must keep as cash reserves with the central bank

Cash Reserve Ratio (CRR)

Definition and Purpose

• The Cash Reserve Ratio (CRR) is a specific percentage of a bank's total deposits that commercial banks are mandated to hold as reserves.

• These reserves must be maintained with the central bank of the country (in India, it's the Reserve Bank of India - RBI).

• The primary objective of CRR is to ensure banks have sufficient liquidity to meet depositor demands and to control inflation by limiting the amount of money banks can lend.

Key Features and Mechanics

• CRR is calculated on the Net Demand and Time Liabilities (NDTL) of banks.

• Banks cannot lend the portion of deposits held as CRR.

• The central bank (RBI) sets the CRR rate. Changes in the CRR rate are a key tool of monetary policy.

• Increasing CRR: This reduces the lendable funds for banks, thereby decreasing the money supply in the economy and helping to curb inflation.

• Decreasing CRR: This increases the lendable funds for banks, thereby expanding the money supply and encouraging economic growth.

Regulatory Aspect

• Failure to maintain the prescribed CRR attracts penalties from the central bank.

• CRR is distinct from the Statutory Liquidity Ratio (SLR), which requires banks to maintain a certain percentage of deposits in liquid assets like government securities, gold, and cash.

Impact on Economy

• CRR directly influences the credit creation capacity of banks.

• It plays a crucial role in managing liquidity in the banking system and safeguarding financial stability.