Monetary policies are significantly affected by the reserve ratio rates. It is decided by the central banks of the respective countries. According to the rules governing the federal reserve system, "Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks."

Let us understand it by the help of an example. Suppose the central bank in USA determines the reserve ratio to be 10%. This would mean that all banks in the country must have 10% of the depositor's money held as cash in the banks. So, if a financial institute has deposits worth $1,000, it should have $100 in reserve. This is also known as CRR or Common Reserve Ratio.

Another reserve ratio, known as liquidity ratio measures the ability of a bank to fulfill its short-term debt obligations. Generally, higher the liquidity ratio, better is the ability of the bank to repay its debts. Similarly, some other parameters that help central banks to formulate policies and manage money supply are lending/deposit rates (base rate, savings bank rate) and policy rates (bank rate, repo rate, reverse repo rate). Though differences may be observed in the basic formulation of these rates in different countries, most of the central banks depends on these rates to control the economy