What is the Cash Reserve Ratio?
Cash Reserve Ratio (CRR) is the minimum amount of total deposits of the customers; the commercial banks have to hold as reserves in the form of cash or deposits with the Central Bank of the country. The main motive of this is to maintain liquidity in the Banks. It is also done to ensure that banks do not run out of money to meet the payment demand of their depositors. For example, if a depositor deposits $1000 (which is also referred as Net Demand and Time Liabilities) in the Bank, and if the CRR is 6%, then the bank will have to reserve $60 (1000 * 6%) with the Central Bank. Therefore, commercial banks will now have only $940 for investments and lending purposes. Hence, if the Banks run out of cash, they will still have $60 safe with the Central Bank. Also, note that the Central Banks do not provide any interest in depositing cash into their accounts.
CRR is a very critical tool in monetary policy. It is used to control the money supply in an economy. It also regulates the inflation rates and liquidity in the nation. The effect of CRR on the above factors will be discussed in this article.
Now, let us understand the calculation of the Cash Reserve Ratio. The formula for calculating the CRR is quite simple.
Cash Reserve Ratio = Reserve requirement * Bank deposits
Where, the Central Banks determines reserve requirement by considering factors such as inflation rate, spending rate, demand and supply, trade deficits, etc.
Bank Deposits are the deposits that are made to commercial banks by the customers. Some amount of these deposits is given to the Central banks. Bank Deposits are also known as Net Demand and Time Liabilities (NDTL) where NDTL includes savings account, current account, and fixed deposit balances.
What does the Cash Reserve Ratio measure?
Cash Reserve Ratio is an essential tool in the measurement of change in the interest rate and inflation.
Let us consider two scenarios:
Scenario 1: Reduction in CRR percentage.
We know that CRR is the minimum amount of cash which is held as reserves by the Central Banks. When the CRR reduces, i.e., when the Central Banks holds a lesser amount of cash, the commercial banks will be left with more amount of money in their hands. This leads to a reduction in the interest rates on loans provided by the banks. As far as inflation is concerned, the decrease in CRR increases the money supply in the economy, and this increase results in the rise in inflation.
Scenario 2: Increase in CRR percentage
When the CRR increases, more cash is to be stored in the Central Banks, and this reduces the cash left in the commercial Banks. Therefore, to make up for that cash, the interest rates on loans are increased. The money supply, on the other hand, is seen to decrease. Hence, when the money supply decreased, the inflation drops down.
A reliable source of information on Cash Reserve Ratio
The statistics on CRR are essential to economists, traders, and investors. There are web portals that provide the data for the same. The data includes actual CRR percentage, previous CRR, historical high and low, short-term and long-term forecast, etc
The below links contain all the data as mentioned above for some countries.
Central banks of the different economic zones also have information about monetary reserves.
International Monetary Found:
What do traders care about Cash Reserve Ratio and what is its impact on the currency?
Traders and investors closely look at the CRR report as they pretty much help them determine the demand in the currency. We know that a change in the CRR results in the change in interest rates and inflation as well. Generally, an increase in the interest rate increases the value of the country’s currency, keeping all other factors being equal. Higher interest rates usually attract foreign investments, hence increases the demand for that currency. While lower interest rates do not attract foreign investment, it also leads to a decrease in the currency’s value. Therefore, we can say that the increase in the CRR increases the value of the currency. This might sound simple, but it is quite complicated, as the currency solely does not depend on the interest rates and has several other aspects that go into it. One of the factors is the relationship between higher interest rates and inflation. If a country can achieve the right balance between the higher interest rates and moderate inflation, the currency can show some bullishness.
Frequency of release
It is seen that most of the countries have the frequency of release to be the same (month on month). While it varies for some countries. For example, China, Malaysia, Brazil, Russia releases its CRR every month, but India releases it on a daily basis.
The Bottom Line
Cash Reserve Ratio is the cash deposited by the commercial banks to the Central Banks, which is held as reserves. CRR maintains the volatility of the banks. It also maintains the inflation rate, which is an important factor in a country’s economy. Regulation of money supply is also done by increasing or decreasing the CRR. CRR values are important for investors as well. For example, for a bank stock investor, a higher CRR implies low margins for banks.