💡 CRR (Cash Reserve Ratio) 💡
The minimum amount of liquidity that banks must hold onto or deposit in the central bank rather than lend out or invest is known as the cash reserve ratio. The central bank of the country sets this requirement.
To understand how CRR helps in controlling the money supply, it is important to understand the money multiplier. For instance, if a bank receives USD 100 Mn in deposits, it is required to hold USD 10 Mn, or 10%, in reserve. The remaining USD 90 Mn, or 90%, could then be lent out; this money would eventually return to the banking system as fresh deposits. Then, with a USD 9 Mn reserve, banks can lend out USD 81 Mn or 90% of that sum. Additionally, that USD 81 Mn will be deposited. This cycle continues, which will reduce or increase the money supply to a huge extent with the slight change in CRR.