Read the following passage carefully : " The Reserve Bank of India (RBI) Governor announced a 50 basis points reduction in the Cash Reserve Ratio (CRR) to 4% during the Monetary Policy Committee (MPC) address on December 6. The Governor noted that this move reflects a balanced approach towards managing liquidity while ensuring economic stability." Based on the above passage and common understanding, answer the following questions : (i) Explain the rationale and the likely impact of the decision taken by the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI). (ii) Define Cash Reserve Ratio (CRR).

Question

Accepted Answer

Based on the passage about RBI reducing CRR by 50 basis points to 4%:

1. This is an expansionary monetary policy
2. Reduction in CRR increases excess reserves of banks
3. Banks have more funds available for lending
4. Credit creation capacity increases
5. Money supply increases
6. Interest rates may decrease
7. Borrowing becomes cheaper
8. Consumption and investment increase
9. Aggregate demand increases
10. Economic growth is stimulated

The 50 basis points reduction in CRR is significant and will have a multiplier effect on credit creation in the banking system.