Economics • Banking & FinanceEasy
What is the primary function of the Reserve Bank of India when it alters the Cash Reserve Ratio (CRR)?
A. To regulate foreign exchange reserves held by commercial banks
B. To control liquidity within the banking system by mandating a specific percentage of net demand and time liabilities to be kept with the central bank✓ Correct Answer
C. To determine the minimum interest rate charged on agricultural term loans
D. To audit the annual balance sheets of cooperative credit societies
💡 Solution & Explanation
The Cash Reserve Ratio requires scheduled commercial banks to maintain a specified percentage of their net demand and time liabilities as cash reserves with the Reserve Bank of India. Raising the CRR reduces the lendable funds available with banks, thereby tightening monetary liquidity, while lowering it expands liquidity. It operates as a direct quantitative instrument of monetary policy. Commercial banks do not earn interest on cash reserves maintained under CRR.
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