- The CRR is the portion of total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank, and the repo rate is rate at which the central bank lends money to banks.
- For example, if the reserve ratio in the U.S. is determined by the Fed to be 11%, this means all banks must have 11% of their depositers’ money on reserve in the bank. So, if a bank has deposits of $1 billion, it is required to have $110 million on reserve.
- RBI uses CRR either to drain excess liquidity or to release funds needed for the growth of the economy from time to time. Increase in CRR means that banks have lesser funds available and money is sucked out of circulation.
- This
- Ensures that a portion of bank deposits is kept with RBI and is totally risk-free,
- Enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money.