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Ratios and OMO

If CRR is inc...

Question

If CRR is increased by RBI, what will be the effect on the market?

A

None of the above

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B

Both A and B

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C

Banks will have to maintain more money as cash or deposits with RBI, hence will have less money to lend or invest, thus reducing the liquidity in the market

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D

Banks will have to maintain more money as cash or deposits with RBI, hence will have less money to lend or invest, thus increasing the liquidity in the market.

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Solution

The correct option is C
Banks will have to maintain more money as cash or deposits with RBI, hence will have less money to lend or invest, thus reducing the liquidity in the market

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.

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