2010 General Studies, all questions
UPSC Prelims 2010 · General Studies
Question 81: Economy and Social Development
When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean ?
aThe commercial banks will have less money to lend
bThe Reserve Bank of India will have less money to lend
cThe Union Government will have less money to lend
dThe commercial banks will have more money to lend
AnswerThe answer is (a).
The Cash Reserve Ratio is the share of their deposits that banks must keep with the RBI as cash. When the RBI raises it, banks have to park more with the RBI and are left with less money to lend or invest, which reduces the money supply and checks inflation. The RBI, the Union government and the banks' lending power do not gain from it. Remember: higher CRR means tighter credit; lower CRR means more lending.
Why each option is right or wrong
- (a) Right: banks must keep more with the RBI, leaving less to lend.
- (b) The RBI holds more reserves and its lending is not reduced.
- (c) The Union government's resources are not directly reduced.
- (d) A higher CRR gives banks less, not more, to lend.
Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2010, General Studies, Series A. The paper on upsc.gov.in.