Cash Reserve Ratio (CRR)

                                                               Cash Reserve Ratio

The Cash Reserve Ratio or the CRR is a regulation used by the Central Banks in most countries by which it sets the minimum fraction of customer deposits and currency that every commercial bank is required to hold as reserves with themselves. The required reserves are generally held in the form of deposits made with the central bank, or as cash physically stored in the vaults of the banks. The CRR is also called the Reserve Requirement.

The CRR is often used as a monetary policy tool by the central bank to influence the country’s interest and borrowing rates by altering the funds available for banks to make loans with. In the West, central banks seldom change the CRR since it would cause instant liquidity problems for banks having low excess reserves. There, they normally prefer using open market operations like selling and buying government bonds to control the monetary policy. In China, the central bank (The People’s Bank of China) utilises the CRR as a tool to fight inflation. It had increased the reserve requirement 10 times in 2007 and 11 times since 2010 beginning.