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 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.

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CollectorBabu · Accepted Answer

Correct Answer: 1 only. Statutory reserves are liquid assets or an amount of money which is kept set aside by banks in Statutory Reserve Accounts. RBI directs commercial banks to keep reserves so as to make sure that commercial banks should carry safe cushioning of assets which can be paid to the customer account on its demand. Statement 3 and 4 are incorrect as Reserve requirements are just for precautionary measures and will not stop banks from having extra profit, so this eliminates options C and D.  To make people’s deposit safe, capital adequacy ratio is the norm. Hence, statement 2 is also not suitable as the explanation of the Statutory Reserve Requirements.

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