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
Smart Elimination
Question clues - Talks about a reserve requirement, likely to control the credit.
But statements 2, 3 and 4 talks about people's deposit, profit making and vault cash, which dosnt adhere to the term reserves.
Potential Trap
Interpretation: The term 'Statutory Reserve Requirements' usually encompasses CRR and SLR. While SLR (Liquidity) ensures safety (Option 2), CRR (Cash Reserve) is a tool for credit control (Option 1). Some keys accept both. However, the provided OCR key is A (1 only).
Answer Key & Explanation
Answer: AThe correct answer is Option A (Based on the provided key).
Explanation: Statutory Reserve Requirements (primarily CRR - Cash Reserve Ratio) are tools used by the Central Bank (RBI) to manage liquidity.
Statement 1 is Correct: By mandating that banks keep a certain fraction of deposits as reserves (CRR), the RBI limits the amount of money banks can lend (create credit). This is the primary monetary policy objective.
Why not Option 2? While SLR (Statutory Liquidity Ratio) does serve a prudential function of ensuring safety and liquidity, the primary macroeconomic purpose of reserve requirements in monetary theory is often cited as credit/money supply control. (Note: This is a debated question, but we stick to the key provided: 1 only).
Value Addition
- CRR: Kept in cash with RBI. No interest is paid.
- SLR: Kept in liquid assets (Cash, Gold, G-Secs) with the bank itself.
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Foundational question based on core concepts.