Correct Option
The Cash Reserve Ratio (CRR) is a percentage of a commercial bank's Net Demand and Time Liabilities (NDTL) that it must maintain as a reserve with the Reserve Bank of India (RBI). This amount is held in cash and cannot be used by banks for lending or investment purposes. When the RBI announces an increase in the CRR, commercial banks are required to deposit a larger portion of their funds with the RBI. Consequently, this action reduces the total amount of money available with commercial banks for onward lending to the public and businesses. This measure typically aims to absorb excess liquidity from the banking system, thereby tightening credit conditions and helping to control inflation.
Incorrect Options
Option (B): The Reserve Bank of India (RBI) functions as the central bank and regulator; it does not engage in commercial lending to the public. The CRR is a monetary policy tool that directly impacts the lending capacity of commercial banks, not the RBI's ability to lend.
Option (C): The lending capacity of the Union Government is determined by its fiscal policy, budgetary allocations, and borrowing programs, which are distinct from the monetary policy tools like CRR employed by the RBI.
Option (D): An increase in the CRR requires commercial banks to hold more funds with the RBI, thereby reducing their available reserves for lending. This directly diminishes, rather than increases, the amount of money commercial banks have to lend.