Question

Consider the following statements:
1) During inflation, RBI increases the Cash Reserve Ratio.
2) During deflation, RBI increases the cash Reserve Ratio.
Which of the statements given above is/are correct?

• A. Only 1
• B. Only 2
• C. Both 1 and 2
• D. Neither 1 nor 2

Answer 1

The correct option is A Only 1

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.