Module: | Priority Sector, Consumer Protection & Digital Lending
Q86: Consider the following:
Assertion (A): The Cash Reserve Ratio (CRR) is often referred to as a "blunt instrument" of monetary policy.
Reason (R): Unlike Open Market Operations (OMO), a change in CRR affects every single bank uniformly and instantly impacts the entire liquidity structure without nuance.
Reason (R): Unlike Open Market Operations (OMO), a change in CRR affects every single bank uniformly and instantly impacts the entire liquidity structure without nuance.
✅ Correct Answer: A
The correct answer is A. Both the assertion and the reason are true, and the reason accurately explains the assertion.
In central banking terminology, CRR is considered a "blunt instrument" because of its aggressive, indiscriminate nature.
When the RBI alters the CRR, it uniformly impacts the reserve requirements of every single scheduled bank simultaneously, instantly locking up or releasing massive amounts of capital across the entire economy.
It lacks the surgical precision or "nuance" of Open Market Operations (OMO) or targeted Repo auctions, where the central bank can buy or sell specific volumes of bonds to fine-tune liquidity on a day-to-day basis.
In central banking terminology, CRR is considered a "blunt instrument" because of its aggressive, indiscriminate nature.
When the RBI alters the CRR, it uniformly impacts the reserve requirements of every single scheduled bank simultaneously, instantly locking up or releasing massive amounts of capital across the entire economy.
It lacks the surgical precision or "nuance" of Open Market Operations (OMO) or targeted Repo auctions, where the central bank can buy or sell specific volumes of bonds to fine-tune liquidity on a day-to-day basis.