| Consider the following: |
| 1. The more the CRR, the less the money available for lending by the banks to players in the economy. |
| 2. In a regime of moderate inflation, high CRR is in place. Which of these statements is/are correct? |
A) Only 1
B) Only 2
C) Both 1 and 2
D) neither 1 nor 2
Correct Answer: A
Solution :
[a] Cash Reserve Ratio (CRR) is the ratio of deposits banks must maintain with the Reserve Bank of India. This implies that if a person deposits Rs.1, 000 in his account, the bank can use it to lend others, but it has to deposit a percentage of that amount with the RBI. Hence, if CRR is 5%, the lender will deposit Rs.50 with the RBI and has Rs. 950 left at its disposal. Lower CRR means bank can give more money as loan = lower interest rates = cheap loan = more people take loan to start business or building house or buying car = boost in economy. However, can also lead to inflation, if people have more cash in their hands than the items available for purchase in the market. Higher CRR = bank can give less money as loan = Higher interest rate = it becomes expensive to start a new factory, buy a new house / car/bike. This can curb inflation but may also lead to slowdown in economy, because people wait for the interest rates to go down, before taking loans. With every cut in 25 basis points in CRR it would infuse the liquidity of Rs. 16000 crore
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