Multiple choice

The effect of increases CRR will be reduced or nullified if

  1. bank rate is reduced

  2. securities are sold in the open market

  3. SLR is increased

  4. people do not borrow from non-banking institutions

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A Correct answer
Explanation

When CRR is increased, banks must keep more reserves with RBI, reducing their lending capacity. However, if the bank rate is reduced simultaneously, borrowing from RBI becomes cheaper, which can offset the restrictive effect of higher CRR. Banks can borrow from RBI at lower rates to meet both reserve requirements and lending needs. Selling securities in open market or increasing SLR would further tighten credit, not offset CRR.

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