top of page

Decrease in Cash Reserve Ratio(CRR) will lead to?

A decrease in the Cash Reserve Ratio (CRR) refers to a reduction in the percentage of deposits that banks are required to hold as reserves with the central bank.


When the CRR is reduced, banks are required to hold less cash with the central bank, which increases the amount of cash available to them to lend or invest in other activities. This can lead to an increase in the money supply, as more funds become available for lending and investment purposes.


As a result, a decrease in the CRR can stimulate economic growth, as it encourages banks to lend more money to individuals and businesses, leading to increased spending and investment. However, it can also lead to inflationary pressures if the increased money supply leads to excessive demand for goods and services without a corresponding increase in supply.


So, imagine you have a piggy bank where you keep all your savings. Now, let's say your parents tell you that you have to keep a certain amount of money in your piggy bank at all times, just in case you need it later. This is kind of like what the central bank does with commercial banks.


Now, let's say your parents decide to lower the amount of money you have to keep in your piggy bank. This means you'll have more money available to spend or save in other places. Similarly, if the central bank lowers the CRR for commercial banks, it means they have to keep less money in their reserves with the central bank. This leaves more money available for the banks to lend out or invest in other things.


So, when the CRR is lowered, banks can lend out more money to individuals and businesses, which can stimulate the economy by increasing spending and investment. However, if too much money is lent out without enough goods and services to buy, prices can rise too much, causing inflation.



Comments


bottom of page