When is an increase made in cash reserve ratio ?
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If there is an increase in the cash reserve ratio, a bank will a low lending capacity in terms of funds. Hence, banks will ask more people to open deposits in their bank accounts. Banks will also raise the interest rate and this step will discourage borrowers from applying for loans due to the increased interest rate.
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During high levels of inflation, attempts are made to reduce the flow of money in the economy. For this, RBI increases the CRR, lowering the loanable funds available with the banks. This, in turn, slows down investment and reduces the supply of money in the economy.
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