The reduction of Cash Reserve Ratio (CRR) by the Reserve Bank of India (RBI) has a significant impact on credit creation in the market. Here are the effects:

Immediate Impact:

1. Increased lending: When CRR is reduced, commercial banks are required to maintain a lower proportion of their deposits as cash reserves with the RBI. This means they have more funds available for lending, which leads to an increase in credit availability.
2. Increased liquidity: Reduced CRR allows banks to lend more, which increases liquidity in the market, making it easier for businesses and individuals to access credit.

Short-term Impact:

1. Increased money supply: With more funds available for lending, banks create new money by increasing their loans and advances, thereby increasing the money supply in the economy.
2. Lower interest rates: To attract more deposits, banks may reduce their lending rates, making borrowing cheaper for consumers and businesses.
3. Economic growth: Increased credit availability and lower interest rates can stimulate economic growth by enabling businesses to invest, expand, and hire more employees.

Long-term Impact:

1. Inflation concerns: While increased credit creation can stimulate economic growth, it can also lead to higher inflation if aggregate demand exceeds aggregate supply.
2. Risk of asset bubbles: Easier credit conditions can lead to over-borrowing and asset bubbles, which can eventually burst and cause economic instability.
3. Increased vulnerability to external shocks: A highly leveraged economy with a high credit-to-GDP ratio may become more vulnerable to external shocks, such as changes in global interest rates or commodity prices.

RBI’s Objectives:

1. Monetary policy transmission: By reducing CRR, the RBI aims to transmit its monetary policy decisions to the real economy, influencing interest rates and credit availability.
2. Economic growth promotion: The RBI seeks to promote economic growth by increasing credit availability and stimulating aggregate demand.
3. Inflation control: The RBI aims to balance the benefits of increased credit creation with the risks of inflation and asset bubbles.

A reduction in CRR by the RBI can lead to increased lending, increased liquidity, and lower interest rates, which can stimulate economic growth. However, it also carries risks such as inflation concerns and asset bubbles. The RBI must carefully balance these factors when setting its monetary policy to achieve its objectives of promoting economic growth while maintaining price stability.