Question

Explain the role of cash reserve ratio in controlling money supply.

Answer 1

Answer:

• Cash Reserve Ratio, it is the percentage of deposits which commercial banks are required to keep as cash according to the directions of the central bank.

• When the central bank wants to increase money supply in the economy, it lowers the reserve ratio.

Explanation:

When the RBI decides to increase the Cash Reserve Ratio, the amount of money that is available with the banks reduces.

• This is the RBI's way of controlling the excess supply of money.

• NDTL refers to the total demand and time liabilities (deposits) that is held by the banks.