Module: | Priority Sector, Consumer Protection & Digital Lending
Q83: In the context of Monetary Policy, if the RBI decides to increase the Cash Reserve Ratio (CRR), what is the immediate expected impact on the banking system?
✅ Correct Answer: B
The correct answer is B. Hiking the Cash Reserve Ratio (CRR) is a primary contractionary monetary policy tool.
When the RBI increases CRR, it forces banks to park a larger, mandatory portion of their deposits as cash with the central bank.
This action immediately removes ("impounds" or "absorbs") that excess liquidity from the active banking system.
Option A is incorrect because impounding funds decreases, not increases, the lendable resources available for credit creation.
Option C is incorrect because banks earn 0% interest on CRR balances; thus, holding more funds as CRR actively reduces profitability.
Option D is incorrect because a scarcity of lendable funds typically increases the cost of funds and drives up lending rates.
When the RBI increases CRR, it forces banks to park a larger, mandatory portion of their deposits as cash with the central bank.
This action immediately removes ("impounds" or "absorbs") that excess liquidity from the active banking system.
Option A is incorrect because impounding funds decreases, not increases, the lendable resources available for credit creation.
Option C is incorrect because banks earn 0% interest on CRR balances; thus, holding more funds as CRR actively reduces profitability.
Option D is incorrect because a scarcity of lendable funds typically increases the cost of funds and drives up lending rates.