BANKING AFFAIRS

Detailed explanation-1: -By increasing the cash reserve ratio, the commercial banks has to maintain more cash with the central bank which reduces their credit creation capacity and therefore money supply in the economy also reduces. Therefore, increase in cash reserve ratio(CRR) reduces the money supply in the economy.

Detailed explanation-2: -So, When CRR is increased, it decreases money supply, Increases interest rates on home loans, car loans etc. and in inter-bank market, Increases demand for money and decreases inflation.

Detailed explanation-3: -CRR includes cash reserves only, but SLR includes liquid assets such as gold, bonds, and securities as well. No interest is earned on the funds reserved as CRR, but banks earn on SLR. CRR funds are kept with the RBI, but SLR funds are kept with the bank itself.

Detailed explanation-4: -The ratio of these liquid assets to the demand and time liabilities is called the Statutory Liquidity Ratio (SLR). The Reserve Bank of India (RBI) has the authority to increase this ratio by up to 40%. An increase in the ratio constricts the ability of the bank to inject money into the economy.

Detailed explanation-5: -When the CRR is minimised, funds are drawn out from the economic system excessively and then the money supply is affected negatively wherein there is a shortage of funds. Since the money supply has declined in this situation, the inflation also reduces.