Question

If RBI changes the CRR, which of the following is correct in this connection?

• A. Increase in CRR does not affect the liquidity position
• B. Increase in CRR increases the liquidity position within Indian Banks
• C. Reduction in CRR increases the liquidity position within Indian banks
• D. Decrease in CRR does not affect the liquidity position

Answer 1

The correct option is C

Reduction in CRR increases the liquidity position within Indian banks

If RBI reduces the CRR, it allows banks to lend more, as they have to maintain lesser reserves. So lending will rise and the money supply and liquidity will increase. Whereas an increase in CRR will decrease the money supply.