ICSE Class 10 Answered

The Cash Reserve Ratio is the necessary minimum percentage of a bank’s total deposits that is to be kept with the central bank. According to the RBI Act, 1934, every commercial bank needs to maintain with the central bank a certain percentage of their deposits in the form of cash reserves. By an amendment of the Act in 1962, the central bank can vary the CRR between 3 and 15 percent of the total deposits of commercial banks.

During inflation, the central bank increases the CRR and thereby the funds for providing loans with the commercial banks decrease. In this process, the flow of credit and the aggregate demand is reduced. Thus, the process of credit creation by the commercial bank is checked and helps control the inflation. On the other hand, the RBI reduces the CRR to curb the deflation situation.