UPSC Prelims 2014 Q33: Indian Economy – Monetary Policy & Money Supply
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.
- (a) 1 only
- (b) 1 and 2 only
- (c) 2 and 3 only
- (d) 1, 2, 3 and 4
Answer: (a) 1 only
Explanation
Purpose of Statutory Reserve Requirements
Statutory reserves are the CRR and the SLR that banks must keep.
| Statement | Verdict | Reason |
|---|---|---|
| 1. To enable the Central Bank to control the amount of advances the banks can create | Correct | Higher reserves leave less to lend; this is their main purpose |
| 2. To make the people's deposits with banks safe and liquid | Incorrect | Safety comes from deposit insurance and supervision, not from these ratios |
| 3. To prevent the commercial banks from making excessive profits | Incorrect | Not a purpose |
| 4. To force the banks to have sufficient vault cash to meet their day-to-day requirements | Incorrect | CRR is kept with the RBI, not in the bank's vault |
The two ratios:
| Ratio | Kept as | Law |
|---|---|---|
| CRR | Cash balance with the RBI | RBI Act, 1934 |
| SLR | Government securities, gold or cash with the bank | Banking Regulation Act, 1949 |
Answer: (a) 1 only.
Why each option is right or wrong
- (a) CORRECT. Reserve requirements let the Central Bank control how much banks can lend.
- (b) Incorrect. Making deposits safe and liquid is not their purpose, per the official key.
- (c) Incorrect. They are not meant to limit bank profits.
- (d) Incorrect. Statements 2, 3 and 4 are not purposes of Statutory Reserve Requirements.
Key point
CRR and SLR: tools for the RBI to control credit creation by banks. CRR is cash with the RBI; SLR is liquid assets with the bank.
Remember
CRR and SLR = control of bank lending.
Common mistakes
- Choosing statement 2; depositor safety comes from deposit insurance (DICGC).
- Thinking CRR is cash kept in the bank's own vault.
- Forgetting that reserves are a monetary policy tool.
Exam tip
Reserve ratios exist to control credit. Everything else is a side effect.
Sources
- Reserve Bank of India — Monetary Policy: instruments (CRR and SLR)
- NCERT Class XII — Introductory Macroeconomics, Ch 3 (Money and Banking)