Money and Banking PYQs – Economics, SSC & Railway

Answer: Option 1 — To decrease the money supply in the economy
A higher reserve requirement makes banks keep a larger share of deposits as reserves, so less is left to lend.
Less lending means less credit creation — the money supply falls. It is a contractionary step, used mainly to control inflation.
Revision note — RBI's quantitative tools of monetary policy
• CRR (Cash Reserve Ratio): share of deposits kept as cash with the RBI; earns no interest. Dec 2024: RBI cut CRR from 4.5% to 4%.
• SLR (Statutory Liquidity Ratio): share of deposits kept by the bank itself in cash, gold or approved government securities (18%).
• Repo rate: rate at which RBI lends to banks short-term (6.5% in Dec 2024); the main policy rate.
• Reverse repo / SDF: rate at which RBI absorbs surplus funds from banks.
• Open market operations: RBI buying securities injects money; selling withdraws it.
• Raise CRR, SLR or repo ⇒ tight money; cut them ⇒ easy money. Simple money multiplier = 1 ÷ reserve ratio.
• As of 2026: the CRR stands at 3% after the 2025 cuts.
Do not mix these up
• CRR vs SLR — CRR is cash parked with the RBI; SLR is liquid assets the bank keeps with itself.
Also asked from this topic: the effect of higher CRR and SLR on bank lending (reduces lending capacity); a qualitative, not quantitative, RBI tool (moral suasion); the RBI's main policy instrument (repo rate).

Answer: Option 1 — It is a combination of persuasion and pressure used by the RBI to influence banks' lending behaviour.
In moral suasion the RBI uses advice, requests, meetings and letters to get banks to lend more or less, or to certain sectors.
It has no legal force — it works through the RBI's authority as the regulator.
Revision note — RBI's tools of credit control
• Quantitative (general) tools control the volume of credit: Repo, Reverse Repo, Bank Rate, CRR, SLR, MSF, OMO.
• Qualitative (selective) tools control the direction of credit: moral suasion, margin requirements, credit rationing, selective credit control, direct action.
• Repo rate — rate at which the RBI lends to banks against securities; set by the Monetary Policy Committee (MPC).
• OMO — the RBI buys or sells government securities: buying adds money; selling takes it out.
• SLR — share of deposits banks keep in liquid assets (cash, gold, G-secs); CRR — share kept as cash with the RBI.
• The RBI was set up on 1 April 1935 under the RBI Act, 1934, and nationalised in 1949.
Do not mix these up
• Moral suasion vs OMO — moral suasion is persuasion; OMO is buying and selling G-secs.
• Moral suasion vs SLR / repo — changing SLR or repo is a quantitative, binding measure; moral suasion is qualitative and voluntary.
Also asked from this topic: the RBI tool that is qualitative and not quantitative (moral suasion); the institution that conducts Open Market Operations (RBI).