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

An increase in the Cash Reserve Ratio (CRR) refers to an increase in the percentage of deposits that banks are required to hold as reserves with the central bank.

When the CRR is increased, banks are required to hold more cash with the central bank, which reduces the amount of cash available to them for lending or investing in other activities. As a result, an increase in the CRR can lead to a decrease in the money supply, as less funds become available for lending and investment purposes.

This can cause a slowdown in economic growth, as banks may be less willing or able to lend money to individuals and businesses. However, it can also help to reduce inflationary pressures by reducing the amount of money in circulation, which can help to maintain price stability over the long term.

Overall, an increase in the CRR is typically seen as a monetary policy tool used by central banks to control inflation and maintain financial stability.

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

So, when the CRR is increased, banks can lend out less money to individuals and businesses, which can slow down the economy by reducing spending and investment. However, it can also help to reduce inflationary pressures by reducing the amount of money in circulation, which can help to maintain stable prices over the long term.

Learn More : Decrease in Cash Reserve Ratio(CRR) will lead to? | Understanding Statutory Liquidity Ratio(SLR): Its significance & Impact on Economy | Difference between Cash Reserve Ratio(CRR) & Statutory Liquidity Ratio(SLR)