Impact of Increase or, Decrease in CRR

Impact of Increase or, Decrease in CRR

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A rise in the CRR or, the cash reserve ratio will result in a bank's limited ability to lend money. As a result, banks will solicit more customers to open deposits in their accounts. Also, banks will increase interest rates, which may deter potential borrowers from applying for loans due to the higher interest rate. This is so because larger borrowing costs are implied by increased interest rates.

Effect of Decrease in Cash Reserve Ratio

Impact on interest rates - As the RBI lowers the cash reserve ratio, banks will have more money to invest in other companies because there will be less money needed to be held with the RBI. This indicates that banks will have an excess of cash, which will result in a decrease in the interest rates levied on loans.

Impact on inflation: When the cash reserve ratio is reduced, commercial banks will have more cash on hand, increasing the amount of money in circulation in the banking system. A growth in the money supply will cause significant inflation since there will be an abundance of money.

When the CRR is minimised, money is unnecessarily taken out of the economy, which has a negative impact on the money supply and creates a funding deficit. In this case, the money supply has shrunk, which also lowers inflation.

Impact of a Higher Cash Reserve Ratio - Banks will have relatively little money when the cash reserve ratio is increased because they are required to keep enormous quantities of cash on hand with the Reserve Bank of India. Banks won't have any money left over to use for other things as a result. Also, keep in mind that the RBI does not pay interest on CRR holdings. Banks now opt to hike interest rates since they are unable to receive any interest. The interest rates on various loan products, such as personal loans, automobile, home, and two-wheeler loans, will have to be raised. Even the borrowers' equated monthly payments (EMIs) would rise when interest rates rise. Your loan costs may increase quite dramatically.