Understanding CRR
CRR is a part of the total deposit held by commercial banks, which are required by the Reserve Bank of India (RBI).
This ensures that a bank never faces a situation from where it cannot withdraw a particular amount and is kept inside the bank’s vault or deposited in the RBI.
The MPC fixes the CRR in its periodical Monetary and Credit Policy.
- Less CRR increases liquidity in the banks, which subsequently leads to investment and lending.
The Importance of CRR - CRR determines the money supply and level of inflation in India
- It also provides for security of the amount so deposited as a part of bank deposit is kept with RBI.
- During the periods of high inflation, the RBI enhances the CRR percentage rate to reduce the liquidity so available with the banks.
- The government can decrease the CRR rate for banks to lend money to different businesses and industries in order to invest.
