CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking
Suppose the Reserve Bank of India wants to reduce the amount of loanable funds with commercial banks without selling any securities. Which instrument would it use?
The RBI would increase the Cash Reserve Ratio. A higher CRR requires banks to hold more of their deposits as cash with the RBI, leaving less money available for lending, and this works without any sale of securities.
- AReducing the Cash Reserve Ratio
- BIncreasing the Cash Reserve RatioCorrect
- CReducing the repo rate
- DBuying government securities in the open market
Explanation
A higher CRR forces banks to keep a larger share of net demand and time liabilities with the RBI as cash, so lendable funds fall. Lowering CRR or the repo rate and buying securities all add liquidity or make credit cheaper, so they expand rather than contract funds.
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