CRR stands for Cash Reserve Ratio. It is the percentage of cash required to be kept in reserves with the central bank by the commercial banks as against their total deposits.
This rate is mainly held for the safeguard of the depositors of the commercial banks. Another objective of CRR is to keep the inflation under control. This rate is usually fixed.
However, during high inflation in the economy, Central Bank raises the CRR to reduce the amount of money left with banks to sanction loan. It squeezes the money flow in the economy, reducing investments and bringing down inflation.
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In contrast, at the time of economic stagnation, the rate is reduced so that the banks can provide loans to a large number of businesses and industries for investment purposes. Lower CRR also boosts the growth rate of the economy.
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