The correct option is 2 only
Explanation
The Cash Reserve Ratio (CRR) is a quantitative instrument of monetary policy used by the Central Bank to control liquidity and the money supply in the economy. It mandates the portion of deposits that commercial banks must hold as reserves with the Central Bank.
Statement-wise Analysis:
- Statement 1 is Incorrect: CRR is the mandatory percentage of a bank's Net Demand and Time Liabilities (NDTL)-essentially its total deposits-that must be maintained in the form of cash with the Central Bank (RBI). This ensures solvency and controls liquidity.
- Statement 2 is Correct: CRR does not increase credit creation capacity indefinitely; rather, it limits it. By locking a portion of deposits as reserves, the Central Bank reduces the pool of loanable funds available to commercial banks, thereby restricting their ability to create credit.
- Statement 3 is Incorrect: The Money Multiplier is inversely related to the reserve ratios (Money Multiplier = $\frac{1}{\text{Reserve Ratio}}$). Consequently, an increase in the CRR leads to a decrease in the value of the money multiplier, as banks have fewer funds to lend out for every unit of deposit received.
Key Takeaway:
There is an inverse relationship between the Cash Reserve Ratio (CRR) and the Money Multiplier. A higher CRR absorbs liquidity and reduces the money multiplier, whereas a lower CRR releases liquidity and increases the multiplier.