When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean?
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UPSC Civil Services preparation
- AThe commercial banks will have less money to lendCorrect
- BThe Reserve Bank of India will have less money to lend
- CThe Union Government will have less money to lend
- DThe commercial banks will have more money to lend
Explanation
The Cash Reserve Ratio refers to the specific portion of total deposits that commercial banks are required to keep as cash reserves with the Reserve Bank of India. When the RBI increases this ratio, banks must set aside a larger share of their deposits with the central bank. Consequently, the amount of funds available with commercial banks to give out as loans to the public decreases. This reduces the overall liquidity in the banking system, making option A the correct answer.
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