Economics • Banking & FinanceMedium
Analyze the operational mechanics of the Cash Reserve Ratio in Indian banking. What mandatory action must scheduled commercial banks take regarding this ratio?
A. Maintain a specified percentage of total demand and time liabilities in liquid cash with the central bank✓ Correct Answer
B. Invest a designated fraction of net deposits exclusively in sovereign government securities
C. Provide collateral-free short-term loans to priority sector agricultural borrowers
D. Keep foreign exchange reserves balanced against international trade deficits
💡 Solution & Explanation
The Cash Reserve Ratio requires scheduled commercial banks to hold a prescribed minimum percentage of their net demand and time liabilities as liquid cash balances directly with the Reserve Bank of India. Unlike the statutory liquidity ratio, which permits investments in approved securities, cash reserve ratio holdings earn no interest. Altering this ratio is a potent quantitative tool for managing systemic liquidity.
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