Write short notes on: 5. Cash Reserve Ratio (CRR)

Write short notes on:
5. Cash Reserve Ratio (CRR)

Answer: 

5. CRR or Cash Reserve Ratio refers to the minimum amount of funds that a commercial bank has to maintain with the Reserve Bank of India in the form of deposits. For example, suppose the total assets of a bank are worth Rs.200 Crores and the minimum cash reserve ratio is 10%, the amount that the commercial bank has to maintain with RBI is Rs.20 Crores. If this ratio rises to 20%, the reserve with RBI increases to Rs.40 Crores. Thus, less money will be left with the commercial bank for lending. This will eventually lead to a considerable decrease in the money supply.

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