CA Foundation · Business Economics · Money Market
When the Reserve Bank of India raises the Cash Reserve Ratio (CRR), what is the most direct immediate effect on commercial banks?
A higher CRR reduces the lendable resources of banks, because a larger part of their deposits must be kept as cash with the RBI. This curbs credit creation and liquidity, so it is a contractionary tool used to control inflation.
- ATheir lendable resources decrease because a larger share of deposits must be held with the RBICorrect
- BTheir lendable resources increase because the RBI pays higher interest on balances
- CTheir holdings of government securities must rise by the same amount
- DTheir deposit base automatically expands
Explanation
CRR is the fraction of net demand and time liabilities that banks must keep as cash balances with the RBI. A higher CRR locks up more funds, so less is available for lending. Option B is wrong because CRR balances do not earn interest to compensate banks; the other options do not follow from a CRR hike.
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