Question

Consider the following statements about the Reserve Requirements:
1) Reserve requirement can be used as an instrument of monetary policy.
2) Required reserve ratio is used as a tool to influence the country's borrowing and interest rates.
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 C Both 1 and 2

Reserve ratios like CRR, SLR are key instruments of monetary policy at the disposal of the RBI. An increase in these ratios can lead to decrease in money supply and liquidity in the market and vice-versa. This in turn can influence the country's borrowing and interest rates as banks change their rates depending upon the money available for lending with them.