Consider the following statements about Cash Reserve Ratio CRR 1 An increase in CRR sucks amount fro...........

Economic Affairs Money Supply and Monetary Policy

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Consider the following statements about Cash Reserve Ratio (CRR)

1. An increase in CRR sucks amount from the economy

2. A decrease in CRR injects amount into the economy

Which of the above statements is/are correct?

1 only

2 only

Both

None

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Explanation:

CRR
It is the percentage of cash deposits that banks need to keep with the Reserve Bank of India on a fortnightly basis.
Presently the CRR is 4% that is, for every Rs 100 deposited in the bank; bank will need to deposit Rs 4 with RBI. Hence, it has Rs 96 to lend.
Increasing the CRR also means banks have lesser money to lend. In the absence of enough liquidity in the financial system, banks have to increase their lending rates to decrease the demand for money.
On the other hand, a cut in CRR infuses more liquidity in the market and banks are pressurized to lend these funds. The lending interest rates to increase the demand for money.
Do you know?
•The statutory liquidity ratio (SLR) is the ratio (fixed by the RBI) of the total deposits of a bank which is to be maintained by the bank with itself in noncash form prescribed by the government to be in the range of 25 to 40 per cent.
THINK!
•Bank Rate
•Repo Rate