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Dear future banker,

CRR, is one of the most commonly heard term in banking. We keep on reading and hearing this
term day in and day out through newspapers/ news channels etc.What is this CRR, and why it is so
important? Let us understand it in detail in this article.

CRR is Cash Reserve Ratio and is defined as It is some percentage of the total NDTL ( Net
Demand and Time Liabilities ) that all the scheduled commercial banks have to necessarily maintain
in the form of cash with the Reserve Bank of India.

Here NDTL, is sum of demand and time liabilities (deposits) of banks with public and other banks
wherein assets with other banks is subtracted to get net liability of other banks. Deposits of banks
are its liability and consist of demand and time deposits of public and other banks.

The Cash Reserve Ratio is governed and managed by the Reserve Bank of India. CRR is a great
tool to ensure that the banks have enough liquidity when required by the banks.CRR is a critical
direct financial instrument and is used for controlling / managing money supply in the economy. At
present the value of CRR is 4% ( as on September 28, 2015).

Let us understand how the change in CRR affects/ effects the money supply in the economy.

Case-I CRR is relatively low: In this condition when the CRR is low,the money that the banks have
to keep with RBI will be low, it means the available money with the banks for loans/advances will be
more( which will eventually be transferred in the economy) as a result, the money supply in the
economy will increase.

Case-II-CRR is relatively high:In this condition when the CRR is high ,the money that the banks have
to keep with RBI will be more, it means the available money with the banks for loans/advances will
be less ( which will eventually be transferred in the economy) as a result, the money supply in the
economy will decrease.

It is important to understand here that the importance of CRR lies with the fact that it directly controls
the money supply in the economy , meaning it also directly influences the growth of the Indian
economy. Hence, it can be safely concluded that CRR is not merely a percentage data but a very
important tool in determining the overall financial health and growth of the economy.

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