Question

What role does CRR play in the creation of credit by the commercial banks?

Answer 1

CRR (cash reserve ratio) sets a limit up to which commercial banks can legally create credit.

Example : If CRR = 4%, it implies that the commercial banks can create credit (by way of loans) of quantum up to a maximum 25 times $(\frac{1}{4\%}=25)$ of their cash reserves with the RBI.