Question : If the Reserve Bank of India reduces the cash reserve ratio(CRR), what will be its effect on credit creation?
Option 1: Increase in the credit
Option 2: Decrease credit creation
Option 3: Have no impact on credit creation
Option 4: Have no definite impact on credit creation
Correct Answer: Increase in the credit
Solution : The correct answer is an increase in the credit .
When the Reserve Bank of India (RBI) reduces the Cash Reserve Ratio (CRR), the economy's credit availability strengthens. This is because the CRR represents the amount of deposits that banks are required to retain as reserves with the central bank. When the CRR is reduced, banks are compelled to keep a smaller proportion of their deposits as reserves, releasing more funds for investment and lending. As a result, banks can increase their lending activity, making more credit available to businesses and individuals.
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