0
0

Cash Reserve Ratio (CRR)

Introduction

Cash Reserve Ratio (CRR) is a key monetary policy tool used to control liquidity in the banking system. It directly affects how much money banks can lend to the public.

CRR questions are very common in banking exams because they are direct, factual, and high-scoring.

Pattern: Cash Reserve Ratio (CRR)

Pattern

Cash Reserve Ratio is the percentage of a bank’s total deposits that must be kept as cash with the Reserve Bank of India.

Step-by-Step Example

Question

What is the immediate impact of an increase in the Cash Reserve Ratio (CRR)?

Options:

  • A. Increase in banks’ lending capacity
  • B. Decrease in banks’ lending capacity
  • C. Increase in money supply
  • D. Increase in bank profitability

Solution

  1. Step 1: Understand what CRR represents

    CRR is the portion of deposits that banks must keep with RBI and cannot use for lending.

  2. Step 2: Analyse the effect of CRR increase

    When CRR increases, banks must keep more funds with RBI.

  3. Step 3: Link CRR with lending capacity

    With less money available, banks’ ability to lend decreases.

  4. Final Answer:

    Decrease in banks’ lending capacity → Option B

  5. Quick Check:

    CRR ↑ → Funds with RBI ↑ → Lending ↓ ✅

Quick Variations

• CRR is maintained in cash form only.

• Banks earn no interest on CRR balances.

• Higher CRR reduces liquidity; lower CRR increases liquidity.

Trick to Always Use

  • Step 1 → CRR = cash kept with RBI
  • Step 2 → CRR ↑ = lending power ↓
  • Step 3 → CRR ↓ = lending power ↑

Summary

Summary

  • Cash Reserve Ratio is the percentage of deposits kept with RBI.
  • CRR directly affects banks’ lending capacity.
  • Banks earn no interest on CRR balances.
  • CRR is used to control liquidity and inflation.

Example to remember:
More cash locked with RBI → Less money to lend → CRR

Practice

(1/5)
1. Cash Reserve Ratio (CRR) is maintained by banks in which form?
easy
A. Cash with the central bank
B. Government securities with RBI
C. Cash with the bank branches
D. Fixed deposits with RBI

Solution

  1. Step 1: Recall the definition of CRR

    CRR is a mandatory reserve requirement.

  2. Step 2: Identify the form of reserve

    It must be kept strictly in cash with the central bank.

  3. Final Answer:

    Cash with the central bank → Option A

  4. Quick Check:

    CRR = cash parked with RBI only ✅
Hint: CRR always means cash with RBI.
Common Mistakes: Confusing CRR with SLR securities.
2. If CRR is reduced by RBI, which of the following is the most likely outcome?
easy
A. Decrease in money supply
B. Increase in banks’ lending capacity
C. Increase in cash locked with RBI
D. Immediate rise in inflation rate

Solution

  1. Step 1: Understand CRR reduction

    Lower CRR frees up funds for banks.

  2. Step 2: Link free funds with lending

    More available funds increase lending capacity.

  3. Final Answer:

    Increase in banks’ lending capacity → Option B

  4. Quick Check:

    CRR ↓ → Funds free → Lending ↑ ✅
Hint: CRR cut = more money to lend.
Common Mistakes: Assuming CRR cut immediately raises inflation.
3. Banks earn interest on the amount kept under Cash Reserve Ratio because:
easy
A. CRR funds are invested by RBI
B. CRR is treated as bank deposits
C. Banks do not earn any interest on CRR balances
D. CRR earns interest at repo rate

Solution

  1. Step 1: Recall the nature of CRR

    CRR is a compulsory reserve.

  2. Step 2: Identify interest treatment

    Banks earn no interest on CRR balances.

  3. Final Answer:

    Banks do not earn any interest on CRR balances → Option C

  4. Quick Check:

    CRR = zero return for banks ✅
Hint: CRR earns zero interest.
Common Mistakes: Linking CRR returns with repo rate.
4. Which authority decides the Cash Reserve Ratio in India?
medium
A. Reserve Bank of India
B. Ministry of Finance
C. Parliament of India
D. Commercial Banks

Solution

  1. Step 1: Identify the monetary authority

    CRR is a monetary policy instrument.

  2. Step 2: Link monetary tools with authority

    Such tools are decided by the central bank.

  3. Final Answer:

    Reserve Bank of India → Option A

  4. Quick Check:

    CRR decisions = RBI authority ✅
Hint: All reserve ratios are fixed by RBI.
Common Mistakes: Assuming government fixes CRR.
5. Which of the following best explains how CRR helps RBI control inflation?
medium
A. By increasing bank profits
B. By fixing lending rates directly
C. By encouraging banks to borrow more
D. By reducing excess liquidity in the system

Solution

  1. Step 1: Identify the inflation problem

    High inflation is often driven by excess liquidity.

  2. Step 2: Link CRR with liquidity

    Higher CRR locks more funds with RBI.

  3. Final Answer:

    By reducing excess liquidity in the system → Option D

  4. Quick Check:

    CRR ↑ → Liquidity ↓ → Inflation control ✅
Hint: CRR absorbs excess money.
Common Mistakes: Assuming CRR directly fixes prices.

Mock Test

Ready for a challenge?

Take a 10-minute AI-powered test with 10 questions (Easy-Medium-Hard mix) and get instant SWOT analysis of your performance!

10 Questions
5 Minutes