BANKING AFFAIRS

Detailed explanation-1: -So, When CRR is increased, it decreases money supply, Increases interest rates on home loans, car loans etc.

Detailed explanation-2: -The Cash Reserve Ratio (CRR) refers to the share of Net Demand and Time Liabilities that banks have to hold as balances with the RBI. The objective of CRR is to keep inflation under control. During high inflation in the economy, the central bank raises the CRR to lower the bank’s loanable funds.

Detailed explanation-3: -Increase in cash reserve ratio lowers the value of credit multiplier. As a result, because of reduction in credit creation capacity of the commercial banks, the aggregate demand also falls in an economy. Was this answer helpful?

Detailed explanation-4: -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-5: -In case of high inflation, RBI increases the CRR which decreases the amount of cash available to the banks for lending purposes. This reduces the money supply in the economy thereby decreasing the rate of inflation in the economy.