Read the following passage carefully :

“The Reserve Bank of India (RBI) Governor announced a $\displaystyle 50$ basis points reduction in the Cash Reserve Ratio (CRR) to $\displaystyle 4$% during the Monetary Policy Committee (MPC) address on December 6. The Governor noted that this move reflects a balanced approach towards managing liquidity while ensuring economic stability.”

Based on the above passage and common understanding, answer the following questions :

(i)

Explain the rationale and the likely impact of the decision taken by the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI).

(ii)

Define Cash Reserve Ratio (CRR).

(i) The decision of the Monetary Policy Committee (MPC) to reduce Cash Reserve Ratio (CRR) addresses the deflationary pressure in the economy. The rationale behind this reduction was to ensure infusion of greater liquidity in the economy to maintain overall economic stability.Reduction in the CRR will lead to greater availability of funds with the commercial banks, which may increase the lending capacity of commercial banks. Thereby, reducing CRR, will increase the money supply and Aggregate Demand in the economy, ultimately addressing the issue of deficient demand.(ii) Cash Reserve Ratio (CRR) refers to the percentage of deposits which commercial banks are required to keep as cash reserves with the Central Bank.