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

1. The commercial banks will have less money to lend
2. The Reserve Bank of India will have less money to lend
3. The Union Government will have less money to lend
4. The commercial banks will have more money to lend

Explanation

Option (a) is correct

• Cash Reserve Ratio is the proportion of a bank’s deposits that must be kept with the Reserve Bank of India. When the RBI increases CRR, commercial banks must park a larger share of their deposits with the RBI. This reduces the funds banks have available to lend to businesses and consumers. For ex, if CRR is 4% and a bank has ₹1000 in deposits, it must keep ₹40 with the central bank, leaving ₹960 for lending.

Answer: (a) The commercial banks will have less money to lend