Home » UPSC CAPF » If the Cash Reserve Ratio is lowered by the RBI, supply of money in th

If the Cash Reserve Ratio is lowered by the RBI, supply of money in th

June 1, 2025 by rawan239

If the Cash Reserve Ratio is lowered by the RBI, supply of money in the economy will :

remain unchanged.

decrease.

increase.

have ambiguous impact.

This question was previously asked in

UPSC CAPF – 2023

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The Cash Reserve Ratio (CRR) is a monetary policy tool used by the central bank (RBI in India). It is the percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be held as a reserve with the RBI. When the RBI lowers the CRR, banks are required to hold a smaller amount of their deposits as reserves with the RBI. This releases more funds for the banks to use for lending purposes. An increase in the lending capacity of banks leads to increased credit creation in the economy. Through the money multiplier effect, this increased lending ultimately results in an increase in the total money supply in the economy.

– CRR is the percentage of NDTL banks must hold with RBI.
– Lowering CRR means banks have more funds available for lending.
– Increased lending leads to credit creation and an increase in money supply.

CRR is one of the quantitative tools of monetary policy. Other tools include the Statutory Liquidity Ratio (SLR), Repo Rate, Reverse Repo Rate, Bank Rate, and Open Market Operations. Lowering CRR is an expansionary monetary policy measure aimed at increasing liquidity and stimulating economic activity by making more credit available. Conversely, increasing CRR is a contractionary measure to reduce liquidity and control inflation.

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