Q. As we know that Cash Reserve Ratio (CRR) is the amount of funds that the banks have to keep with the Reserve Bank of India. Consider the following consequences , if Reserve Bank of India decides to increase the CRR substantially in its monetary policy:
- The banks will have to keep more money with RBI and this dries up the liquidity.
- The Banks will have to increase the Interest rates on their Home Loan products
- The banks will be able to earn more money due to increased interest rates.
Which among the above statements hold true?
Answer:
1 & 2 only
Notes: The correct answer is 2 & 3 only. Explanation: 1. Liquidity Impact: An increase in CRR means banks must hold more reserves with the RBI, reducing the funds available for lending, thus drying up liquidity (Statement 1 is true). 2. Interest Rates: To maintain profitability with reduced lending capacity, banks often raise interest rates on loans, including home loans (Statement 2 is true). 3. Earnings from Interest: While banks may earn more from higher interest rates, the overall lending volume decreases due to reduced liquidity, which can offset potential earnings (Statement 3 is misleading). Trivia: The CRR is a tool used by central banks globally to control inflation and stabilize the economy. In India, the CRR is currently set at 4.5% (as of October 2023).