What is deposit reserve ratio

The deposit reserve ratio, also known as the reserve requirement, is a tool used by central banks to control the amount of money that commercial banks are required to hold in reserves, rather than lend out or invest. This ratio is set by the central bank and is typically expressed as a percentage of a bank's total deposits. By adjusting the deposit reserve ratio, central banks can influence the amount of money that is available for lending and investment in the economy. When the reserve requirement is increased, banks are required to hold more of their deposits in reserves, which limits their ability to lend and invest. This can help to slow down economic activity and control inflation. Conversely, when the reserve requirement is decreased, banks have more funds available for lending and investment, which can stimulate economic growth. The deposit reserve ratio also plays a key role in the money creation process. When banks receive deposits, they are required to hold a certain percentage of these funds in reserve, but they are able to lend out the remainder. This process allows banks to create new money in the form of loans, which can increase the money supply in the economy. Overall, the deposit reserve ratio is an important tool for central banks to manage the money supply and influence economic activity. It is a key component of monetary policy and is used to achieve specific economic goals, such as controlling inflation, supporting economic growth, and maintaining financial stability.