Cash Reserve Ratio refers to the minimum percentage of time and demand deposits, required to be kept by every commercial bank with the central bank.
It is one of the tools of the monetary policy of the RBI to control the credit creation capacity of the commercial bank.
In turn, it controls the money supply.
A change in CRR affects the ability of commercial banks to create credit.
An increase in CRR reduces the excess reserves of commercial banks.
Fewer loans are advances with less cash reserves.
It limits their credit-creating power.
On the other hand, a decrease in CRR increases the excess reserves of commercial banks.
More loans are advances with large cash reserves.
It increases their credit-creating power.
That is how central bank controls the money supply in the economy of a country.