Question
In the context of Indian economy; which of the following is/are the purpose/purposes of 'Statutory Reserve Requirements'?
1. To enable the Central Bank to control the amount of advances the banks can create
2. To make the people's deposits with banks safe and liquid
3. To prevent the commercial banks from making excessive profits
4. To force the banks to have sufficient vault cash to meet their day-to-day requirements
Select the correct answer using the code given below.
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Answer:
A
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Explanation:
Statutory Reserve Requirement is an instrument used by the Reserve Bank of India (RBI) to manage liquidity and ensure banks have sufficient reserves to meet account holders' demands. It consists of two components: the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).
The CRR is the portion of deposits that banks must keep with the RBI in the form of cash. It helps the RBI control the amount of credit that banks can create. When the central bank wants to increase money supply, it lowers the CRR.
The SLR requires banks to maintain a certain percentage of their demand and time deposits in specified liquid assets. It provides a cushion of liquid assets to ensure banks' stability and enhance their ability to meet depositor demands.
The purpose of the Statutory Reserve Requirement is not to prevent excessive bank profits or to force banks to maintain sufficient cash for day-to-day requirements. Instead, it serves as a precautionary measure to manage the economy's liquidity and regulate credit creation.