What is CRR Rate?

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with
Central bank (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.

In order to understand this consider the following example,
Example 1

• Suppose RBI says CRR rate is 5%.
• Now a bank A receives 100 as deposit then it can lend 95rs as loan and will hav to keep 5rs as balance in deposit account
• Now a borrower who has received 95rs as loan will deposit the same in his bank with rate of interest.
• Now the bank will lend 90.25rs as loan to another customer and keep 4.75rs in deposit account.
• The rate of interest is the profit for the bank.
• This process continues in the banking system resulting to expand its initial deposit of Rs100 to maximun of Rs2000.  

Example 2

• Suppose if RBI says CRR rate is 10%.
• Now a bank A receives 100 as deposit then it can lend 90rs as loan and will hav to keep 10rs as balance in deposit account
• Now a borrower who has received 90rs as loan will deposit the same in his bank with rate of interest.
• Now the bank will lend 81rs as loan to another customer and keep 9rs in deposit account.
• The rate of interest is the profit for the bank.
• This process continues in the banking system resulting to expand its initial deposit of Rs100 to maximun of Rs1000.