What is meant by cash reserve ratio?

Answer 1

This is the amount of money that the banks have to necessarily park with the RBI. The base of this is the total of the deposits that a bank has. The RBI pays the bank interest on the amount parked with it. The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank.

Answer 2

Cash Reserve Ratio or CRR in India is the amount of money that every bank has to deposit with the RBI per customer. Every time a customer deposits cash to the bank, the bank has to correspondingly deposit a portion of that cash to the RBI. RBI decides this percentage of money that each bank has to deposit with it. The RBI holds the control on the CRR because, the CRR can influence the credit conditions in our country. If the CRR is increased, the amount of liquid cash in circulation in the country would come down and similarly if the CRR is decreased, the cash circulation in the country would increase.

Say if the CRR of the country is 10%, and you go to a bank to deposit Rs. 1000/- the bank will have to deposit at least Rs. 100/- with RBI. The remaining funds can be used by the bank to grant loans to other customers and earn an income for itself