Economics • Banking & FinanceMedium
What specific purpose does the Cash Reserve Ratio serve as a quantitative tool of monetary policy implemented by the Reserve Bank of India?
A. Ensuring banks maintain a minimum level of gold reserves to back currency notes
B. Regulating the amount of liquidity available with commercial banks to control credit creation✓ Correct Answer
C. Providing long-term development finance for infrastructure projects in rural areas
D. Insuring retail depositor accounts against commercial bank liquidation and fraud
💡 Solution & Explanation
Cash reserve ratio requires scheduled commercial banks to keep a specified percentage of their total net demand and time liabilities as reserves with the Reserve Bank of India, directly restricting their credit creation capacity. Raising the cash reserve ratio absorbs liquidity from the banking system, helping curb inflationary pressures. Lowering it releases funds, encouraging lending and economic activity. These reserves do not earn interest from the central bank.
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