With reference to Indian economy, consider the following statements:
- A1 only
- B2 onlyCorrect
- CBoth 1 and 2
- DNeither 1 nor 2
Explanation
The correct answer is B because statement 2 is correct while statement 1 is incorrect.
Statement 1 is incorrect because an increase in the Cash Reserve Ratio CRR actually decreases the banking system liquidity. When the central bank raises the CRR, commercial banks are required to keep a larger portion of their deposits with the RBI, leaving them with less money to lend to the public.
Statement 2 is correct because the RBI uses Open Market Operations OMO as a tool to manage liquidity. To reduce excess liquidity in the economy and control inflation, the RBI sells government securities. When banks buy these securities, money flows from the commercial banks to the RBI, thereby reducing the overall money supply.
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