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Money and Banking (part – II)

📆 September 24, 2024

Total Questions: 268

71. Since the economic reforms were launched in India, which one of the following statements is true for Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) of the commercial banks : [U.P.P.C.S. (Pre) 1999]

Correct Answer: (d) Both SLR and CRR have been reduced
Solution:Accepting the recommendations of Narasimham Committee, RBI had reduced the SLR from 38.5% in 1991 to 25% in 1997. CRR was also changed with time. In May, 1996 CRR was at 13% and there was a tendency to decrease in it overtime. In November, 1999, CRR was reduced to 9%. As on 7 June, 2024, CRR is at 4.50% and SLR is at18%.
Cash Reserve Ratio/ Required Reserve Ratio/Reserve RatioStatutory Liquidity Ratio
  •  Banks are required to maintain with the Reserve Bank a certain percent of its Total Demand and Time liabilities.
  •  SLR is that percentage of the deposits which the banks have to hold with themselves.
  •  Mandated by Reserve Bank of India Act, 1934
  • Mandated under Banking Regulation Act 1949
  •  CRR is maintained only in cash form.
  •  SLR can be maintained in the form of Gold, Cash and other securities approved by RBI.
  • No interest is earned on the CRR.
  • Interest is earned on SLR.
  • Helps regulate the liquidity in the economy.
  •  Helps regulate the Credit facility in the economy; Reduction in SLR increases liquidity in the economy
  • It is calculated on the bank's Total Demand and Time liabilities.
  • It is calculated on banks Net Demand and Time Liabilities.
  • The range of permissible CRR is between 3 and 15 per cent
  •  SLR has an upper limit of 40% and a lower limit of 23%
  •  Decided by RBI's Monetary Policy Committee.

72. The mandatory proportion of the total deposits and reserve of the commercial banks deposited with the Reserve Bank of India is called : [Chhattisgarh P.C.S. (Pre) 2008, U.P.P.C.S. (Mains ) 2013]

Correct Answer: (d) Cash Reserve Ratio
Solution:The Reserve Bank of India (RBI) mandates the commercial banks to store a proportion of their deposits in the form of cash so that the same can be given to the bank's customers if the need arises. The percentage of cash required to be kept in reserves, vis-a-vis a bank's total deposits, is called the Cash Reserve Ratio (CRR). By definition, CRR is the average daily balance that a bank is required to maintain with the Reserve Bank as a share of such percent of its NDTL (Net Demand and Time Liabilities) that the Reserve Bank may notify from time to time. The cash reserve is either stored in the bank's vault or is sent to the RBI.

73. An increase in CRR by the Reserve Bank of India results in : [U.P.P.C.S. (Pre) 2010]

Correct Answer: (b) reduction in liquidity in the economy
Solution:The Reserve Bank of India mandates the commercial bank to hold a certain minimum amount of deposits as reserves with the RBI. The percentage of cash required to be kept in reserve as against the bank's total deposits (NDTL), is called Cash Reserve Ratio (CRR) . A higher CRR means there is less availability of loanable funds, in turn it reduces the supply of money (liquidity) in the econonmy.

74. Lowering the Cash Reserve Ratio, it will have the following impact on the economy : [B.P.S.C. (Pre) (Re-Exam) 2020]

1. Banks will have higher leverage to liquidity.

2. The economy may see increased investment .

3. Supply of currency in the economy may broaden.

4. Real investment rate may decline.

Select the correct code :

Correct Answer: (e) more than one of the above
Solution:Cash Reserve Ration (CRR) is described as a particular percentage of cash deposits that must be maintained by every bank in India as per the requirements of the RBI. If RBI lower the CRR, the banks will have higher leverage to liquidity because it increases, the loanable funds with the bank. The bank in turn can sanction further loans to businesses and industry for different investment purpose and the economy may see increased investment. It also increase investment. It also increases the overall supply of money in the economy . Hence, Statement 1, 2 and 3 are correct while statement 4 is incorrect.

75. If the Cash Reserve Ratio is lowered by the RBI, its's impact on credit creation will be : [B.P.S.C. (Pre) 2008]

Correct Answer: (a) Increase
Solution:Cash Reserve Ration (CRR) is described as a particular percentage of cash deposits that must be maintained by every bank in India as per the requirements of the RBI. If RBI lower the CRR, the banks will have higher leverage to liquidity because it increases, the loanable funds with the bank. The bank in turn can sanction further loans to businesses and industry for different investment purpose and the economy may see increased investment. It also increase investment. It also increases the overall supply of money in the economy . Hence, Statement 1, 2 and 3 are correct while statement 4 is incorrect.

76. When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, What does it mean ? [U.P.S.C (Pre) 2010]

Correct Answer: (a) The commercial banks will have less money to lend
Solution:Increase in CRR means that the banks have to deposits more with the RBI and will have less money to lend to the borrowers. Through this act, RBI tries to reduce the money supply and control the inflation.

Cash Reserve Ratio (CRR) is the share of a bank's total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash.
The bank cannot use this amount for lending and investment purposes and does not get any interest from the RBI.
CRR applies to scheduled commercial banks, while the regional rural banks and NBFCs are excluded.
Key objectives of the Cash Reserve Ratio

  • CRR helps control inflation. In a high-inflation environment, RBI can increase CRR to prevent banks from lending more.
  • CRR also ensures banks have a minimum amount of funds readily available to customers even during huge demand.
  • CRR serves as the reference rate for loans. Also known as the base rate for loans, the banks cannot offer loans below this rate.
  • Since CRR regulates the money supply, it boosts the economy whenever required by lowering the CRR.

77. When RBI announced an increase in Cash Reserve Ratio (CRR) then what does it mean ? [Chhattisgarh P.C.S. (Pre) 2017]

Correct Answer: (c) The commercial bank will have less money to lend
Solution:Increase in CRR means that the banks have to deposits more with the RBI and will have less money to lend to the borrowers. Through this act, RBI tries to reduce the money supply and control the inflation.

Cash Reserve Ratio (CRR) is the share of a bank's total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash.
The bank cannot use this amount for lending and investment purposes and does not get any interest from the RBI.
CRR applies to scheduled commercial banks, while the regional rural banks and NBFCs are excluded.
Key objectives of the Cash Reserve Ratio

  • CRR helps control inflation. In a high-inflation environment, RBI can increase CRR to prevent banks from lending more.
  • CRR also ensures banks have a minimum amount of funds readily available to customers even during huge demand.
  • CRR serves as the reference rate for loans. Also known as the base rate for loans, the banks cannot offer loans below this rate.
  • Since CRR regulates the money supply, it boosts the economy whenever required by lowering the CRR.

78. Which one of the following statements is correct regarding increase in the Cash Reserve Ratio in India ? [U.P.P.C.S (Mains) 2004]

Correct Answer: (b) It reduces credit creatin
Solution:Increase in CRR means that the banks have to deposits more with the RBI and will have less money to lend to the borrowers. Through this act, RBI tries to reduce the money supply and control the inflation.

Cash Reserve Ratio (CRR) is the share of a bank's total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash.
The bank cannot use this amount for lending and investment purposes and does not get any interest from the RBI.
CRR applies to scheduled commercial banks, while the regional rural banks and NBFCs are excluded.
Key objectives of the Cash Reserve Ratio

  • CRR helps control inflation. In a high-inflation environment, RBI can increase CRR to prevent banks from lending more.
  • CRR also ensures banks have a minimum amount of funds readily available to customers even during huge demand.
  • CRR serves as the reference rate for loans. Also known as the base rate for loans, the banks cannot offer loans below this rate.
  • Since CRR regulates the money supply, it boosts the economy whenever required by lowering the CRR.

79. Repo Rate comes under purview of : [U.P.P.C.S. (Mains) 2017]

Correct Answer: (a) Monetary Policy
Solution:Repo (Repurchase Option) Rate is the key monetary policy rate of interest at which the Central Bank or the Reserve Bank of India (RBI) lends short term money to banks, essentially to control credit availability, inflation and the economic growth. Repo Rate in India is the primary tool in the RBI's Monetary and Credit Policy. Other Policy rates, such as Reverse Repo Rate and Marginal Standing Facility Rate, are often directly linked with Repo Rate of RBI. Reverse Repo Rate is, one the other hand, an exact opposite of the Repo Rate. Banks park money with the RBI for short term the prevailing Reverse Repo Rate.

80. 'Repurchase Option' is used : [U.P. Lower Sub. (Pre) 1998]

Correct Answer: (d) None of the above
Solution:'Repurchase Option' (or Repo Rate) is used by the Reserve Bank of India (RBI) to regulate the money supply and inflation in the economy. Hence, option (d) is the correct answer.
  • The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks against government securities.
  • It serves as a primary tool for the RBI to regulate liquidity, control inflation, and influence overall economic activity.
  • By adjusting the repo rate, RBI can either encourage banks to borrow more (by lowering the rate) or discourage borrowing (by raising the rate), thus influencing the money supply in the economy.
    Impact of RBI Repo Rate Cut
  • Lower Borrowing Costs: Commercial banks benefit from reduced borrowing costs, enabling them to offer loans at more competitive interest rates.
  • Fixed Deposit (FD) Interest Rates: Banks typically lower FD rates after a repo rate cut, as their own cost of funds decreases. This means new FDs will offer lower returns, while existing FDs remain unaffected until maturity
  • Enhanced Credit Flow: Lower interest rates encourage increased borrowing by businesses and consumers, stimulating investment and consumption.
  • Boost to Real Estate and Infrastructure: Due to more affordable financing options, sectors like real estate and infrastructure may see heightened activity.
  • Support Amid Global Challenges: The RBI's accommodative stance aims to bolster the Indian economy against global uncertainties, such as increased U.S. tariffs impacting exports.
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