Cash deposit ratio plays a crucial role in banking operations. The banks try to fine-tune it. They do not want to hold more than necessary cash reserves because in that case they lose some of the profit, which they can otherwise earn.
Liquidity ratio is the proportion of assets of bank recognized as "liquid" by the central bank to its total assets. The proportion can be prescribed and revised at the discretion of the central bank within a prescribed range.
The following are the limitations of the method of variable cash reserve ratio, such as this method is not effective when the commercial banks keep very large excessive cash reserves. In such a case ever if cash reserve 'ratio is raised, ample reserves remain after satisfying the minimum requirements.