Economics • Banking & FinanceMedium
What is the primary purpose of the 'Cash Reserve Ratio' maintained by scheduled commercial banks with the Reserve Bank of India?
A. To finance short-term agricultural loans provided to regional rural cooperatives
B. To ensure liquidity and control money supply within the domestic economy✓ Correct Answer
C. To provide venture capital funding for micro, small, and medium enterprises
D. To subsidize interest rates on long-term infrastructure bonds issued by public sector undertakings
💡 Solution & Explanation
The Cash Reserve Ratio is the minimum percentage of a bank's total deposits that must be maintained in cash with the Reserve Bank of India. Altering this ratio allows the central bank to effectively manage liquidity and control credit creation in the banking system. Statutory Liquidity Ratio requires banks to maintain a portion of deposits in approved liquid assets like government securities.
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