BANKING AFFAIRS

Detailed explanation-1: -The correct answer is It will increase. Cash Reserve Ratio (C. R. R.) refers to the number of money banks have to keep with the central bank. If RBI reduces the cash reserve ratio, credit creation will increase.

Detailed explanation-2: -When CRR increases from 10% to 20%, credit multiplier is reduced to half of its earlier value. Accordingly, the supply of credit in the economy should reduce to half, when other things are constant.

Detailed explanation-3: -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-4: -When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.

Detailed explanation-5: -When the CRR rate is reduced by RBI, commercial banks can offer more advances to borrowers which in turn increases the flow of cash to the public. CRR helps in improving the declining rate by absorbing the liquidity when market interest rates go down intensely.