Question

Statement (1): An increase in CRR reduces the cash reserves of commercial banks.

Statement (2): Commercial banks are required to maintain CRR in the form of cash reserves.

Options

• Both the statements are true.

• Both the statements are false.

• Statement 1 is true, Statement 2 is false.

• Statement 2 is true, Statement 1 is false.

Answer 1

Both the statements are true.

Explanation:

• Statement (1): An increase in CRR requires commercial banks to lock up a larger portion of their deposit base with the central bank, thereby draining and reducing their readily available, liquid cash reserves for lending.
• Statement (2): Regulatory law requires banks to keep this precise statutory quota strictly in the form of liquid cash balances deposited with the Reserve Bank of India (RBI).