CRR Rate - Full Form, Meaning and Current CRR Rate

CRR Rate - Full Form, Meaning & Current CRR Rate

CRR Rate - Full Form, Meaning & Current CRR Rate

CRR Rate in Banking is one of the important topics to study in the banking awareness section for any competitive exams in the banking sector in India. Minimum one question in any banking examination is asked on CRR Rate.

CRR Rate is one of the important tools used by the Reserve Bank of India to control inflation.

Under this article, we will cover the following contents :

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1. CRR full form in banking

2. What is CRR Rate?

3. Objectives of CRR in Banking

4. How Cash Reserve Ratio impacts the Indian economy?

5. CRR formula & CRR calculation

6. Current CRR Rate

7. Important points to remember under CRR Rate

8. Important questions asked in competitive exams on Cash Reserve Ratio Rate

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1. CRR full form in banking

CRR stands for the cash reserve ratio. The full form of CRR is repeatedly asked in various competitive exams like IBPS, SBI PO, SBI Clerk, and other banking exams.

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2. What is CRR Rate?

CRR Rate or Cash Reserve Ratio Rate is an amount of share or fund that a bank has to keep every day with the central bank of the nation i.e. RBI ( Reserve Bank of India ) in form of Cash.

CRR Rate is defined under section 42 ( 1 ) of the RBI Act 1934.

Cash Reserve Ratio Rate is one of the important instruments of Monetary Policy.

Earlier, the CRR limit was between 3 % to 20 % but later as per RBI Amendment Bill 2006, it is limitless. No interest is paid on CRR by Reserve Bank of India to any banks.

In certain countries, CRR Rate is also termed as Reserve Requirements.

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3. Objectives of CRR in Banking

CRR Rate is used as Base Rate or Reference Rate to lend money or loan by a bank. Thus, CRR Rate is fixed by RBI to maintain transparency in the credit system either it be lending of credit or borrowing of credit.

CRR Rate is also introduced by RBI to ensure safety to the bank as well as the clients of the bank by depositing a part of share or fund every day.

As Cash Reserve Ratio Rate is one of the important tools of monetary policy, it plays an important role to keep inflation or excess money supply under control. During high inflation, RBI increases the CRR Rate which lowers the amount with bank available for the lending purposes and vice - versa.

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4. How Cash Reserve Ratio impacts the Indian economy?

Earlier in this post, it is told that CRR Rate is an important instrument of monetary policy and thus it holds great impacts on the Indian economy.

A. Impacts on Indian Economy if CRR Rate is increased

If RBI increases Cash Reserve Ratio Rate, fewer funds are available with banks to lend and thus it will control excess money supply in the economy. During high inflation, RBI increases CRR Rate which leads to an increase in interest rates on loans provided by the bank. This slows down investment and thus reduces the money supply in the economy. As a result, inflation comes down.

B. Impacts on Indian Economy if CRR Rate is decreased

If RBI increases Cash Reserve Ratio Rate, more funds are available with the bank for investment as well as lending loans. It results in a decrease in interest rates on loans provided by the bank. This leads to rising in a number of startup companies or businesses or investment in goods and services. As a result, it boosts the growth rate of the economy.

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5. CRR formula and CRR calculation

CRR is calculated on the basis of NDTL ( Net Demand and Time Liability ).

Suppose if the current CRR Rate is 4 % then,

CRR Formula = 4 % of NDTL

NDTL = ( Demand Deposit + Time Deposit ) - Liability

Demand Deposit = ( Saving Deposit + Current Deposit )

Time Deposit = ( Fixed Deposit + Recurring Deposit )

Liability = ( Loans + Other Withdrawals + Other Investments )

For better understanding CRR Calculation and CRR formula, here is an example :

Suppose a customer has deposited Rs 5000 in Demand Deposit (either in saving a/c or current a/c ) and Rs 5000 in Term Deposit ( Fixed or Recurring Deposit). Now another customer withdrawal Rs 1000 from its Demand Deposit ( either from saving a/c or current a/c). Also, the bank has to provide a loan of Rs 2000 to a customer.

Then, NDTL = 5000 + 5000 – ( 1000 + 2000 ) = 7000

Thus CRR = 4 % of 7000 = 280

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6. Current CRR Rate

Present CRR Rate is 4 % [ Please check once with RBI official website ]

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7. Important points to remember under CRR Rate

A. CRR stands for Cash Reserve Ratio. It is also known as a reserve requirement.

B. CRR Rate is defined as an amount of money every bank in India had to deposit every day at the time of closing to RBI based on current CRR Rate.

C. RBI doesn't pay any interest on CRR to banks.

D. CRR is calculated on a daily basis based on NDTL ( Net Demand and Time Liability )

E. CRR is either stored with RBI or Currency Chest which is equivalent to RBI in the form of Cash.

F.  RBI can change CRR anytime depending on the need to control liquidity in the system and combat inflation.

G. Earlier, the CRR limit was between 3 % to 20 % but later as per RBI Amendment Bill 2006, it is limitless.

H. Present CRR Rate is 4 %

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8. Important questions asked in competitive exams on Cash Reserve Ratio Rate

Q 1. What is the current CRR Rate defined by RBI?
A. 3 %
B. 4 %
C. 4.25 %
D. 20 %

Q 2. CRR is stored in form of _______.
A. Cash
B. Gold
C. Foreign Currency
D. Assets

Q 3. What is the maximum ceiling on CRR Rate?
A. 20 %
B. 10 %
C. No Limit
D. None of These

Q 4. What is the full form of CRR?
A. Cash Reserve Ratio
B. Credit Reserve Rate
C. Cash Reserve Rate
D. Credit Requirement Rate

Q 5. Which section defines the concept of CRR in the RBI Act 1934?
A. Section 45 ( 1 )
B. Section 54 ( 1 )
C. Section 24 ( 1 )
D. Section 42 ( 1 )