Commercial banks hold reserves of Rs 200. The RBI raises the Cash Reserve Ratio (CRR) from 10 per cent to 20 per cent. The total deposits that these reserves can support will:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → fall from Rs 2,000 to Rs 1,000
Given:
Reserves of commercial banks = Rs 200
CRR rises from 10 per cent (0.1) to 20 per cent (0.2)
The relation is deposits = reserves × money multiplier, where money multiplier = 1 / CRR.
At a CRR of 10 per cent:
\( \displaystyle \text{Money multiplier} = \frac{1}{0.1} = 10 \)
\( \text{Deposits} = 200 \times 10 = \text{Rs } 2{,}000 \)
At a CRR of 20 per cent:
\( \displaystyle \text{Money multiplier} = \frac{1}{0.2} = 5 \)
\( \text{Deposits} = 200 \times 5 = \text{Rs } 1{,}000 \)
Rs 1,800 and Rs 800 are the loans (deposits minus reserves), not the deposits.
NCERT (2026-27): “3.3.2 Limits to Credit Creation and Money Multiplier … Since the bank is only expected to keep 20 per cent of its deposits as reserves, thus, reserves of Rs 100 (20per cent of 500 = 100) can support the deposits of Rs 500. In other words, our bank can give a loan of Rs 400. Table 3.3 demonstrates its balance sheet.
“3.4 Policy Tools to Control Money Supply … It should be evident by now that if the Central bank changes the reserve ratio, this would lead to changes in lending by the banks which, in turn, would impact the deposits and hence, the money supply. …” |
