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 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.

QUESTION

Medium

Economy

Prelims 2014

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 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.

Select an option to attempt

Explanation

Statement 1 is correct: This is the primary purpose of CRR and SLR. By changing these ratios, the RBI can control the credit-creating capacity of banks:

↑ Higher reserve ratios → ↓ lending capacity → contraction of credit.
↓ Lower reserve ratios → ↑ lending capacity → expansion of credit.

Statement 2 is correct: These reserves ensure that banks keep a portion of deposits as cash or liquid assets, providing liquidity and safety to depositors. This helps maintain confidence in the banking system.

Statement 3 is incorrect: The purpose of CRR and SLR is monetary stability, not profit regulation. Profit levels are influenced by market conditions, not central bank policy instruments directly.

Statement 4 is incorrect: Banks maintain working cash voluntarily for daily operations. Statutory reserves are not meant to force vault cash but to meet regulatory liquidity requirements.

Trusted by 2L aspirants