Solution
Option 1 -> When CRR increases, banks have less money to lend, so money supply cannot increase.
Option 2 -> Higher CRR means banks must keep more reserves with RBI, reducing their lending capacity and decreasing money supply.
Option 3 -> CRR directly impacts bank lending ability, so money supply cannot remain constant.
Option 4 -> This is similar to Option 3; CRR changes affect money supply.
Hence, Option 2: Money supply decreases -> When RBI increases the Cash Reserve Ratio (CRR), commercial banks are required to keep a larger portion of their deposits as reserves with the central bank. This reduces the amount of funds available for banks to lend to customers. Since banks create money through credit creation (lending), a reduction in their lending capacity directly reduces the money multiplier effect, leading to a contraction in the overall money supply in the economy. This is a contractionary monetary policy tool used to control inflation. -> correct