Consider the following statements: Statement I: Cash Reserve Ratio (CRR) helps the RBI control inflation in the economy. Statement II: By increasing CRR, the RBI increases the lending capacity of banks to stimulate economic growth. Which one of the following is correct? |ForumIAS

[A] Both Statement I and Statement II are correct, and Statement II is the correct explanation of Statement I.

[B] Both Statement I and Statement II are correct, but Statement II is not the correct explanation of Statement I.

[C] Statement I is correct, but Statement II is incorrect.

[D] Statement I is incorrect, but Statement II is correct.

Answer: C

Notes:

Explanation:

CRR is a monetary policy tool used by the RBI to control inflation. By increasing CRR, RBI reduces the money supply in the economy, thereby helping control inflation.
Increasing CRR reduces, not increases, the lending capacity of banks. It absorbs liquidity, hence not used to stimulate growth but to curb excess money supply.

Source: Indian Economy (Ramesh Singh)