Consider the following statements in the context of Cash Reserve Ratio CRR 1 Cash Reserve Rati...........

Economic Affairs Money Supply and Monetary Policy

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Consider the following statements in the context of Cash Reserve Ratio (CRR):

(1) Cash Reserve Ratio (CRR) has to be maintained by all scheduled banks in India.

(2) Increasing CRR makes loans costlier and pushes up interest rates on deposits.

Which of the statements given above is/are correct?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

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Explanation:

The Cash Reserve Ratio (CRR) is the ratio (fixed by the RBI) of the total deposits of a bank in India which is kept with the RBI in the form of cash. All scheduled banks have to maintain CRR with RBI. So, Statement 1 is correct.
An increase in CRR takes money out from the economy, while a decrease in CRR injects money into the economy. When CRR is increased funds with banks decreases and thereby loans becomes costlier and in order to raise more resources, banks increase the interest rate on deposits. So, Statement 2 is correct.