When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean?

Cash Reserve Ratio (CRR) is the share of a bank’s deposits that must be kept as cash reserves with the RBI; for example, if CRR = 20% on Rs 100 deposits the bank must hold Rs 20 and can lend only the remaining Rs 80 [1]. Changing the CRR is a quantitative monetary tool precisely because altering the reserve ratio directly changes banks’ capacity to create credit: an increase in the reserve ratio reduces the funds banks can lend, thereby contracting money supply [2]. Practical descriptions of CRR state explicitly that a higher CRR leaves less liquidity with banks for lending and investment. Hence option (1) is correct.

Sources

1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42