Q. Which RBI action best curbs excess banking system liquidity?
Answer: Increases the Cash Reserve Ratio (CRR)
Notes: The RBI increases the Cash Reserve Ratio (CRR) to absorb surplus liquidity from banks. In August 2023, RBI required banks to maintain a 10% incremental CRR on certain deposit increases. Higher CRR compels banks to hold more deposits as reserves with RBI, reducing their capacity to lend and thus controlling excess liquidity in the financial system.