Question

When the RBI announces increase of the Cash Reserve Ratio, what does it mean?
1. The Commercial banks will have less money to lend
2. The Reserve Bank of India will have less money to lend
3. The Union Government will have less money to lend
4. The commercial banks will have more money to lend

Answer 1

Correct Answer - Option 1 : The Commercial banks will have less money to lend

The correct answer is The Commercial banks will have less money to lend.

• Cash Reserve Ratio
  • CRR is an important measure of the Monetary Policy.
  • Monetary Policy is the procedure of regulating the supply of money in an economy by the country's monetary authority.
  • A specific CRR is provided to every commercial bank in India by the RBI.
  • The Reserve Bank of India is ceremonial to make monetary policy under the Reserve Bank of India Act, 1934 and can set the cash reserve ratio between 3% and 15%.

• CRR is an important weapon of the Monetary Policy which provides the following advantages
  • CRR manages the money supply and the level of inflation in the country.
  • CRR ascertains the security of the reserved amount as the specific amount of the bank’s deposit is stored with the Reserve Bank of India which can be readily available as per the need of the customers.
  • CRR also has a primary role to play during high inflation.
  • During high inflation, the Reserve Bank of India increases the CRR rate to lessen the amount of money that is available with the banks.
  • This reduces the abundant flow of money in the economy.
  • During the need of funds, the government can decrease the rate of the CRR to help the banks in providing loans to various businesses and industries for investment.
  • A low rate of CRR also enhances the growth rate of the economy.