Reserve deposit ratio
Also called: RDR · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"
Meaning
The reserve deposit ratio (rdr) is the share of deposits that banks keep as reserves instead of lending. Reserves are cash in their vaults plus their deposits with RBI. The Cash Reserve Ratio (CRR) sets the legal minimum. The rdr is a key driver of the money multiplier: the less banks keep as reserves, the more they can lend and the more money they create.
Formula for the money multiplier:
m = (1 + cdr)/(cdr + rdr)
where cdr is the currency deposit ratio. If cdr = 0, then m = 1/rdr.
Example
If banks keep 20% of deposits as reserves, rdr = 0.2 and the simple multiplier is 1/0.2 = 5. An initial deposit of ₹100 can then grow to ₹500 of deposits. If the rdr rises to 25%, the multiplier falls to 4.
Don't confuse with
- Statutory Liquidity Ratio (SLR): SLR assets include government securities and are held by the bank itself. They are not counted in reserves.
Related concepts
- Credit creation
- Bank balance sheet
- Bank reserves
- Money multiplier
- Currency deposit ratio
- Bank run
- High-powered money
- Currency in circulation
- Money supply
- M1