Money and banking

Indian Economic System(HCS)

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Indian Economy - Understanding the basics of Indian economic system

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An increase in the Cash Reserve Ratio (CRR) by the RBI , is likely to lead to

Lower interest rates

Reduction in fiscal deficit

Increase in Foreign Portfolio Investment

Lower lending by banks

Explanation:

If RBI decides to increase CRR, banks will keep more cash with RBI and lend less. Lower money circulation would reduce economic activity. So, d is correct.
Fiscal deficit depends on government’s receipts and expenditures. CRR does not have a direct bearing on fiscal deficit. So, b is wrong.
FPI depends on interest rates in the country and general investment climate. Even though higher may push up interest rates, the transmission is very slow as interest rates do not change suddenly due to a CRR hike. So, c is incorrect

By: Kritika Kaushal

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