Economics • Banking & FinanceMedium
What is the primary purpose of the 'Cash Reserve Ratio (CRR)' maintained by scheduled commercial banks with the Reserve Bank of India?
A. To provide emergency liquidity support to agriculture and micro-enterprises during droughts
B. To ensure that banks maintain a specified percentage of their total demand and time liabilities as liquid cash reserves with the central bank✓ Correct Answer
C. To finance long-term infrastructure projects sponsored by state governments
D. To guarantee deposits of individual retail customers up to a statutory ceiling
💡 Solution & Explanation
Cash Reserve Ratio requires scheduled commercial banks to keep a stipulated percentage of their net demand and time liabilities as cash reserves with the Reserve Bank of India to control money supply and ensure liquidity. It acts as a monetary policy instrument to regulate credit creation capacity in the economy. Unlike the Statutory Liquidity Ratio, CRR must be maintained strictly in the form of cash balances with the central bank. Higher reserve ratios restrict the lending capacity of commercial banks.
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