Cash Reserve Ratio is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes.

These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank.

The reserve ratio is sometime used as a tool in monetary policy, influencing the country’s economy,borrowing, and interest rates. Western central banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves; they prefer to use open market operations to implement their monetary policy. The People’s Bank of China does use changes in reserve requirements as an inflation-fighting tool, and raised the reserve requirement nine times in 2007. As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply M1), and zero on time deposits and all other deposits. An institution that holds reserves in excess of the required amount is said to hold excess reserves.

Cash reserve Ratio (CRR) in India is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down.RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.