BANKING AFFAIRS

Detailed explanation-1: -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-2: -More flow of credit to desired sectors.

Detailed explanation-3: -During high levels of inflation, attempts are made to reduce the flow of money in the economy. 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.

Detailed explanation-4: -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-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.