Question

CRR and SLR increase ________ credit in the economy.

• A. contracts
• B. increases
• C. stabilizes
• D. none of above

Answer 1

The correct option is A contracts

Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must keep as reserves with the central bank in the form of cash whereas Statutory Liquidity Ratio (SLR) refers to liquid assets i.e. cash which the commercial banks must hold with themselves on a daily basis as a portion of their total deposits. By increasing the cash reserve ratio and statutory liquidity ratio, the commercial banks has to maintain more cash with the central bank and with themselves respectively which decreases the credit creation capacity of the banks and therefore, contracts the total volume of credit in the economy.