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Questions
State the impact of an increase in Cash Reserve Ratio on loanable funds.
What is the impact of an increase in Cash Reserve Ratio on loanable funds?
Solution
- An increase in the Cash Reserve Ratio (CRR) requires commercial banks to maintain a higher portion of their deposits as reserves with the Reserve Bank of India.
- This reduces the amount of money available to banks for lending, resulting in a fall in total loanable funds.
- As a result, bank's ability to lend to consumers and businesses decreases, thereby slowing economic activity.
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