Q. 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
Select the correct answer using the code given below. (UPSC Prelims 2014)
Answer:
1 only
Notes: The correct answer is
[A] 1 only. Statutory Reserve Requirements, primarily the
Cash Reserve Ratio (CRR) and the
Statutory Liquidity Ratio (SLR), are essential tools used by the Reserve Bank of India (RBI) to manage monetary policy and credit creation.
- Controlling Advances (Statement 1 – Correct): This is the primary macroeconomic purpose. By increasing reserve requirements, the RBI reduces the "loanable funds" available with banks. This restricts the banks' ability to create credit (advances), thereby controlling the money supply and inflation in the economy.
- Safety and Liquidity of Deposits (Statement 2 – Incorrect): While reserves provide a buffer, the primary mechanism for making deposits "safe" in India is the Deposit Insurance and Credit Guarantee Corporation (DICGC), which insures deposits up to 5 lakh. SLR keeps assets in liquid forms (like Gold or Govt Securities), but the purpose of the statutory mandate is credit control and government financing, not primarily depositor safety.
- Preventing Excessive Profits (Statement 3 – Incorrect): The objective of the RBI is not to regulate the profit margins of commercial banks. While high reserve requirements might inadvertently lower a bank's profitability (as CRR earns zero interest), it is a side effect of monetary tightening, not a policy goal.
- Vault Cash for Day-to-Day Requirements (Statement 4 – Incorrect): Banks maintain "Vault Cash" based on their own internal assessment of daily withdrawal patterns. CRR is held with the RBI, and SLR is held in specific liquid assets. Neither is meant to address the immediate physical cash needs at a bank counter.
Statutory reserves act as a "leverage" that the Central Bank pulls to either suck liquidity out of the system or inject it back in to stimulate growth.