What are the likely impacts of reducing the Cash Reserve Ratio CRR 1 Reduction in interest rates 2 R...........

Indian Economy (Easy) Money and banking

What are the likely impacts of reducing the Cash Reserve Ratio (CRR)?

1. Reduction in interest rates

2. Rise in inflation

3. Flight of foreign capital

4. Reduction in fixed deposits.

Select the correct answer using the code given below

1 and 2 only

2, 3 and 4 only

1, 3 and 4 only

1, 2, 3 and 4

All codes are correct.

CRR is part of RBI’s monetary policy which helps eliminate liquidity risk and regulate money supply in the economy. In the case of inflation, RBI increases the CRR due to which interest rate increases, and the capacity of banks to lend also decreases. With fewer loans, less money is available in the market hence, inflation is reduced.
When CRR is reduced, more funds are available to banks for deploying in other businesses because they need to keep fewer amounts with RBI. This means that the banks would have more money to play and this leads to reduction of interest rates on Loans provided by the Banks.
In context with inflation, reduction in CRR leaves more money in the hands of commercial banks and this leads to increase in the money supply in system. When money supply increases, too much money chases too few goods and this leads to rise in inflation.
Further In reducing the CRR, interest rate also down which further result in Flight of foreign capital and Reduction in fixed deposits.

Hence option 4th is correct.