Q: In the context of Indian economy; which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?
a) To enable the Central Bank to control the amount of advances the banks can create
b) To make the people’s deposits with banks safe and liquid
c) To prevent the commercial banks from making excessive profits
d) To force the banks to have sufficient vault cash to meet their day-to-day requirements
The Correct Answer is 1 only.
Statutory Reserve Requirement
- It is a quantitative monetary policy instrument to manage liquidity.
- RBI requires commercial banks to keep reserves in order to ensure that banks have sufficient assets to draw on when account holders want to be paid. Hence, Statement 2 is not correct.
- Cash Reserve Ratio is the fraction of their deposits that banks must keep with RBI to make the people’s deposits with banks safe and liquid.
- When the central bank wants to increase the money supply in the economy, it lowers the reserve ratio. Hence it enables the Central Bank to control the number of advances the banks can create. Hence statement 1 is correct.
- Reserve requirements are designed as “precautionary measures” to control the economy and not to stop banks from “excessive” profit and not to force the banks to have sufficient cash to meet their day-to-day requirements. Hence statement 3 and 4 is incorrect.
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