UPSC Prelims 2014 Question:

In the context of the 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:

Explanation:

• • The statutory reserve requirements are liquidity measures prescribed by the Reserve Bank of India.
  • These measures include the CRR or the Cash Reserve Ratio, SLR or Statutory Liquidity Ratio. 
  • During times of low credit offtake as well as to boost growth, the reserve requirements may be lowered to decrease the cost of capital While the reserve requirements may be increased to tighten the money supply and therefore control  inflation. Further, the reserve requirements also help in ensuring liquidity in the banking system while ensuring there is no bank run and the deposits are safe. Thus, it enables the Central Bank to control the amount of advances the banks can create and control liquidity in the economy. So, point 1 is correct.
    
    

• Statutory Reserve Requirements are measures used by the Central bank to control money supply in the supply. It is not aimed at preventing the commercial banks from making excessive profits or to force them to have sufficient vault cash to meet their day-to-day requirements or to make people’s deposit with banks safe and liquid. These reserves are maintained so that banks have sufficient assets and can pay the account holders (when they want). So, point 2, 3 and 4 are not correct.
  
  

Therefore, option (1) is the correct answer.

Subject: Economics | Money and Banking