The Reserve Requirement Ratio (RRR) or Cash Reserve Ratio (CRR) is the percentage of customer deposits and other liquid assets that commercial banks must store, within their institution or with the central bank.
The RRR is set by the central bank to ensure that commercial banks have enough assets to pay their depositors in case of unusually high withdrawals.
What is Reserve Requirement Ratio?
The Reserve Requirement Ratio (RRR) is a key regulatory tool used by central banks to control the amount of funds that financial institutions, such as commercial banks, must hold in reserve against their deposit liabilities.
The RRR is typically expressed as a percentage, indicating the proportion of a bank’s total deposit liabilities that must be held as reserves.
These reserves can be held either as cash in the bank’s vault or as deposits at the central bank.
What is the purpose of the Reserve Requirement Ratio?
The primary purpose of the RRR is to ensure financial stability, facilitate the smooth functioning of the payment system, and implement monetary policy.
By adjusting the RRR, central banks can influence the supply of money and credit in the economy, as well as control short-term interest rates.
- When the central bank raises the RRR, banks are required to hold a larger portion of their deposit liabilities in reserve, which reduces the amount of funds available for lending. This can lead to a contraction in the money supply and tighter monetary conditions.
- When the central bank lowers the RRR, banks can hold a smaller portion of their deposits in reserve, which increases the amount of funds available for lending and potentially leads to an expansion in the money supply and looser monetary conditions.