In the context of Indian economy, which of the following is/are the purpose/purposes of 'Statutory Reserve Requirements'? 1. To enable the Central Bank to control the amount of advances the banks can create 2. To make the people's deposits with banks safe and liquid 3. To prevent the commercial banks from making excessive profits 4. To force the banks to have sufficient vault cash to meet their day-to-day requirements Select the correct answer using the code given below.
- (a) 1 only ✓ UPSC's answer
- (b) 1 and 2 only
- (c) 2 and 3 only
- (d) 1, 2, 3 and 4
Why the answer is (a)
• Statutory reserve requirements (CRR and SLR) oblige banks to hold a share of their deposits with the RBI or in liquid assets; their primary purpose is monetary control — limiting the credit banks can create (statement 1).
• The official key treats the other purposes as incorrect: deposit safety and liquidity (2) is a secondary effect but deposits are protected mainly by DICGC insurance and prudential norms; reserves are not meant to curb profits (3) or to provide vault cash for daily needs (4), since CRR is held with the RBI, not in the vault.
• Hence 1 only, option (a).
Why the other options are wrong
- (b) 1 and 2 only
- Deposit safety is not the statutory purpose per the key.
- (c) 2 and 3 only
- Reserves are not meant to limit bank profits.
- (d) 1, 2, 3 and 4
- Vault cash is not the purpose; CRR is held with the RBI.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2014, held on 24 August 2014. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.