When the Reserve Bank of India announces an increase of the Cash Reserve Ratio what does it mean ........

Economic Affairs Types of Banks and Banking

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When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean?

The Commercial banks will have less money to lend

The Reserve Bank of India will have less money to lend

The Union Government will have less money to lend

The Commercial banks will have more money to lend

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Explanation:

1st option is correct.
When RBI increases the CRR, less funds are available with banks as they have to keep larger protions of their cash in hand with RBI. This means that banks will now have less money to play with. Moreover, Reserve Bank does not pay any interest on the CRR balances.
Under CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI which means banks do not have access to that much amount for any economic activity or commercial activity.
If CRR increases the Commercial banks will have less money to lend.