In the context of Indian economy, which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?
- To enable the Central Bank to control the amount of advances the banks can create
- To make the people’s deposits with banks safe and liquid
- To prevent the commercial banks from making excessive profits
- 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.
[UPSC Civil Services Exam – 2014 Prelims]
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
- The Statutory Reserve Requirement is a tool used to manage liquidity in the banking system. It involves two key instruments: the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).
- The CRR is the portion of banks’ deposits that they are required to keep with the Reserve Bank of India (RBI), ensuring that they have adequate assets to fulfill withdrawal requests from account holders.
- On the other hand, the SLR mandates that banks maintain a certain percentage of their total demand and time deposits in the form of specified liquid assets.
- To regulate the money supply in the economy, the central bank can adjust the reserve ratio.
- Lowering the reserve ratio increases the availability of funds for banks to lend, thereby expanding the money supply.
- Consequently, the central bank can control the extent of credit creation by banks.