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.
1 only
1 and 2 only
2 and 3 only
1, 2, 3 and 4
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Answer is Right!
This question was previously asked in
UPSC IAS – 2014
1. By requiring banks to hold a portion of their deposits as reserves (cash with RBI for CRR, approved securities for SLR), the RBI limits the amount of funds banks have available for lending, thereby influencing credit creation and controlling the money supply. This directly enables the Central Bank to control the amount of advances banks can create.
2. CRR and SLR ensure that banks maintain a certain percentage of their liabilities in highly liquid assets (cash or approved securities), making a portion of the depositors’ funds safe and available if needed, thus enhancing the safety and liquidity of deposits.
4. Reserve requirements mandate holdings with the RBI (CRR) or in specific assets (SLR), not necessarily in the bank’s own vault cash for day-to-day requirements. Banks manage their day-to-day liquidity needs through other means, although reserve requirements do contribute to overall liquidity.