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Q15 (IAS/2010) Economy › Money, Banking & Inflation › Monetary policy tools Answer Verified

Which of the following terms indicates a mechanism used by commercial banks for providing credit to the government ?

Result
Your answer: —  Â·  Correct: D
Explanation

Statutory Liquidity Ratio (SLR) is the requirement that scheduled commercial banks maintain a specified portion of their net demand and time liabilities in safe and liquid assets such as cash, gold and government (approved) securities. By mandating banks to hold a portion of deposits in government securities, SLR effectively channels bank funds into government debt—i.e., it is a mechanism by which banks provide credit to the government through purchase of government securities [1]. Textbook descriptions of SLR also emphasise that this statutory reserve limits credit creation by banks while ensuring banks invest in government instruments [2]. Hence SLR (option 4) is the correct choice.

Sources

  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > INCREMENTAL CASH RESERVE RATIO > p. 168
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
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SIMILAR QUESTIONS

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Which one of the following is considered as an agency function of commercial banks in India?

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The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following? 1. Other banks retain their deposits with the RB I. 2. The RBI lends funds to the commercial banks in times of need. 3. The RBI advises the commercial banks on monetary matters. Select the correct answer using the codes given below: