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.

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Explanation

Statement 1 is correct: Statutory Reserve Requirements, which include the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR), are the primary quantitative tools used by the RBI to regulate the money supply and control the credit-creation capacity (advances) of commercial banks.

Statement 2 is incorrect: Although maintaining reserves helps manage bank liquidity, the specific "safety" of people's deposits is the mandate of the Deposit Insurance and Credit Guarantee Corporation (DICGC) and the implementation of Capital Adequacy Ratios (Basel norms), rather than being the primary policy purpose of statutory reserves.

Statement 3 is incorrect: These requirements are instruments of monetary policy and are not designed to regulate or prevent the profits made by commercial banks.

Statement 4 is incorrect: Statutory reserves like CRR must be kept with the RBI, and SLR is kept in liquid assets like government securities. Banks maintain their own "vault cash" separately to meet day-to-day operational requirements.

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