When the RBI increases the reserve ratio, the banking system can support fewer loans from the same reserves. To meet the increased reserve requirement, banks would have to:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → call back some loans
A higher reserve ratio means banks must keep more reserves against the same deposits. With fixed reserves, they can support fewer loans, so they must call back some loans. Money supply then falls.
NCERT (2026-27): “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. In the previously discussed example, what would the money multiplier be if the RBI increases the reserve ratio to 25 per cent? … But the banking system would now be able to loan Rs 300 only. It would have to call back some loans to meet the increased reserve requirements. Hence, money supply would fall.” |