BANKING AFFAIRS

Detailed explanation-1: -For this, RBI increases the CRR, lowering the loanable funds available with the banks. This, in turn, slows down investment and reduces the supply of money in the economy. As a result, the growth of the economy is negatively impacted. However, this also helps bring down inflation.

Detailed explanation-2: -A high value of CRR forces banks to keep more reserves and hence helps increase the value of reserve deposit ratio, thus diminishing the value of the money multiplier and money supply or liquidity in the economy.

Detailed explanation-3: -When CRR is reduced, more funds are available to banks for deploying in other businesses because they need to keep fewer amounts with RBI. This means that the banks would have more money to play and this leads to a reduction of interest rates on loans provided by the Banks and it increases lendable resources.

Detailed explanation-4: -The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks can’t lend the CRR money to corporates or individual borrowers, banks can’t use that money for investment purposes.