CRR Full Form- Cash Reserve Ratio

What is CRR? The full form of CRR is Cash Reserve Ratio. 

Among the reference rates used to calculate the base rate is the cash reserve ratio. The minimal lending rate that a bank is not permitted to lend money below is known as the base rate. The Reserve Bank of India sets the base rate (RBI). 

In the credit market, transparency regarding lending and borrowing is guaranteed by the fixed rate. In order for the banks to offer loans that are affordable, the Base Rate also helps them reduce the cost of lending. 

The Cash Reserve Ratio guarantees that a portion of the bank's deposit is safe because it is held by the Central Bank. Controlling inflation is one of CRR's other goals. 

The RBI increases the CRR in an effort to lower the amount of money available to banks for loan approvals during periods of strong economic inflation. It curbs the flow of money through the economy, which lowers inflation and discourages investment.

The Impact of CRR on the Economy

One of the key elements of the RBI's monetary policy, which controls the nation's money supply, rate of inflation, and liquidity, is the cash reserve ratio (CRR). Liquidity with the banks decreases as the CRR rises and vice versa. There are efforts to slow the flow of cash through the economy when inflation is high.

RBI lowers the loanable funds that banks have available by raising the CRR in order to achieve this. As a result, the economy's money supply is decreased and investment is slowed down. Consequently, this has a detrimental effect on the economy's growth. But this also aids in reducing inflation.

Conversely, when the RBI wishes to add money to the system, it decreases the CRR, which raises the amount of money that banks can lend out. In turn, the banks authorise a significant volume of loans to companies and the industry for various investment uses. Additionally, it expands the economy's total money supply. In the end, this accelerates the rate of economic growth.