Economics • Banking & FinanceEasy
What is the primary function of the 'Cash Reserve Ratio' maintained by scheduled commercial banks in India?
A. To provide funds for infrastructure development projects sponsored by state governments
B. To ensure liquidity and regulate money supply within the domestic financial system✓ Correct Answer
C. To finance foreign exchange reserves held by the central bank abroad
D. To guarantee microfinance loans disbursed to women self-help groups
💡 Solution & Explanation
The Cash Reserve Ratio refers to the mandatory minimum percentage of total demand and time liabilities that commercial banks must maintain as cash balances with the Reserve Bank of India. By altering this ratio, the central bank effectively controls the credit creation capacity of commercial banks and manages systemic liquidity. Mistaking it for a developmental fund source ignores its monetary policy role. The Reserve Bank of India Act, 1934 empowers the central bank to determine this ratio within statutory limits.
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