Question

Explain the role of Cash Reserve Ratio in controlling credit creation.

Answer 1

CRR refers to the minimum proportion of the total deposits that the commercial banks has to maintain with the central bank in the form of reserves. An increase in CRR, would mean that banks would be required to keep a greater portion in form of deposits with the central bank. This implies that the commercial banks are left with lesser amount of funds to lend out. Hence, the lending capacity of the banks reduces, leading to fall in the money supply. On the contrary, a fall in CRR will lead to an increase in the money supply.