What is CRR?

 

 

In short, Indian banks are required to hold a certain proportion of their deposits as cash. In reality they don't hold these as cash with themselves, but with Reserve Bank of India (RBI), which is as good as holding cash. This ratio (what part of the total deposits is to be held as cash) is stipulated by the RBI and is known as the CRR, the cash reserve ratio. When a bank's deposits increase by Rs100, and if the cash reserve ratio is 10, banks will hold Rs10 with the RBI and lend Rs 90. The higher this ratio, the lower is the amount that banks can lend out. This makes the CRR an instrument in the hands of a central bank through which it can control the amount by which banks lend.

 

So a hike in CRR is a way that RBI uses to reduce the liquidity without increasing actual interest rates.

 

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