Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
Q33 (IAS/2014) Economy › Money, Banking & Inflation › Monetary policy tools Official Key

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.

Result
Your answer: —  ·  Correct: A
Explanation

The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.[5] This directly supports statement 1. The CRR and SLR enable RBI to control the amount of money that banks can create and make public deposits safe and liquid.[7] This confirms both statements 1 and 2, while also addressing statement 3 about liquidity.

Statement 3 about preventing excessive profits is **incorrect**. The documents make no mention of profit control as a purpose of statutory reserve requirements. The primary purposes are monetary control and depositor safety, not profit regulation.

Statement 4 is also **incorrect**. Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash. These reserves are kept partly as cash and partly in the form of financial instruments (bonds and treasury bills) issued by the RBI.[8] CRR is maintained with the RBI, not as vault cash in bank premises. Banks keep only a small proportion of their deposits as cash with themselves. For example, banks in India these days hold about 5 per cent of their deposits as cash.[9] The vault cash requirement is separate from statutory reserve requirements.

Therefore, only statements 1 and 2 are correct purposes of statutory reserve requirements.

Sources
  1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  3. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  4. [4] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  5. [5] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  6. [6] 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
  7. [7] 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
  8. [8] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.3 MONEY CREATION BY BANKING SYSTEM > p. 39
  9. [9] Understanding Economic Development. Class X . NCERT(Revised ed 2025) > Chapter 3: MONEY AND CREDIT > LOAN ACTIVITIES OF BANKS > p. 41
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
50%
got it right
PROVENANCE & STUDY PATTERN
Full view
Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. In the context of Indian economy, which of the following is/are the purpose/purposes of 'Statutory Reserve Requirements'? 1. To enable t…
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10

This is a foundational concept question directly from NCERT Class XII Macroeconomics. It tests whether you understand the 'Why' (Policy Objective) behind CRR/SLR, not just the 'What' (Definition). The challenge isn't the source material—it's distinguishing between the Regulator's primary intent (Safety/Control) and the secondary side-effects (Profit reduction).

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Do statutory reserve requirements in the Indian economy enable the Reserve Bank of India to control the amount of advances commercial banks can create?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
Presence: 5/5
“Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.”
Why this source?
  • Explicitly states that a statutory reserve ratio (example CRR) limits the portion of deposits available for loans.
  • Gives numeric example showing reserves reduce funds banks can use to give loans, linking reserve requirement to credit creation.
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
Presence: 5/5
“Scheduled Commercial Banks are required to maintain SLR as per the Banking Regulation Act 1949. The ceiling on SLR is 40%. Deposits of public are the liability of banks. The public's demand deposits are demand liability of the bank and time deposits are time liability of the banks and the total demand and time deposits of the public is called 'Net Demand and Time Liabilities (NDTL)' of the banks. The CRR and SLR enable RBI to control the amount of money that banks can create and make public deposits safe and liquid. It ensures that banks have a safe cushion of assets to draw on when account holders want to be paid.”
Why this source?
  • Directly says CRR and SLR enable the RBI to control the amount of money banks can create.
  • Connects reserve requirements to both control of bank-created money and safety/liquidity of deposits (policy intent).
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Box No. 3.2: Demonetisation > p. 49
Presence: 4/5
“RBI regulates money supply by controlling the stock of high powered money, the bank rate and reserve requirements of the commercial banks. It also sterilises the money supply in the economy against external shocks.”
Why this source?
  • States RBI regulates money supply by controlling reserve requirements among other instruments.
  • Links reserve requirements to RBI’s broader monetary control role, supporting the mechanism implied in the statement.
Statement 2
Are statutory reserve requirements in the Indian economy intended to make people's bank deposits safe?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
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
Presence: 5/5
“Scheduled Commercial Banks are required to maintain SLR as per the Banking Regulation Act 1949. The ceiling on SLR is 40%. Deposits of public are the liability of banks. The public's demand deposits are demand liability of the bank and time deposits are time liability of the banks and the total demand and time deposits of the public is called 'Net Demand and Time Liabilities (NDTL)' of the banks. The CRR and SLR enable RBI to control the amount of money that banks can create and make public deposits safe and liquid. It ensures that banks have a safe cushion of assets to draw on when account holders want to be paid.”
Why this source?
  • Explicitly states CRR and SLR 'enable RBI to control the amount of money that banks can create and make public deposits safe and liquid'.
  • Says these requirements ensure banks have a 'safe cushion of assets' to meet withdrawals, directly linking reserves to depositor safety.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
Presence: 4/5
“Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.”
Why this source?
  • Defines CRR as a percentage of deposits kept as cash reserves, reducing funds available for loans.
  • States the statutory reserve ratio 'acts as a limit to the amount of credit that banks can create', an instrument that supports deposit safety by limiting over-extension.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 42
Presence: 4/5
“Since the bank is only expected to keep 20 per cent of its deposits as reserves, thus, reserves of Rs 100 (20per cent of 500 = 100) can support the deposits of Rs 500. In other words, our bank can give a loan of Rs 400. Table 3.3 demonstrates its balance sheet. Thus, money supply increases from Rs 100 to Rs 500. Given a CRR of 20 per cent, the bank cannot give a loan beyond Rs 400. Hence, requirement of reserves acts as a limit to money creation. create deposits of Rs (5 X 100)=Rs 500.”
Why this source?
  • Explains how reserves support a multiple of deposits and that given CRR the bank cannot lend beyond a limit.
  • Concludes 'requirement of reserves acts as a limit to money creation', reinforcing the safety/liquidity rationale behind reserve rules.
Statement 3
Are statutory reserve requirements in the Indian economy intended to make people's bank deposits liquid?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
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
Presence: 5/5
“is called CRR. "In terms of Section 42(1) of the RBI Act, 1934 the Reserve Bank, having regard to the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate". Statutory Liquidity Ratio (SLR) The amount of reserves that the scheduled commercial banks are required to maintain with themselves on a daily basis in safe and liquid assets such as government securities, gold and cash with respect to their NDTL is called SLR. Excess CRR balances are also treated as liquid assets for the purpose of SLR i.e., SLR can be maintained as cash balance with RBI.”
Why this source?
  • Defines SLR as reserves that banks must maintain in safe and liquid assets (government securities, gold, cash).
  • Explicit link between statutory reserve requirement and holding liquid assets supports the idea that reserves ensure liquidity.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
Presence: 5/5
“Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.”
Why this source?
  • States banks are required to keep some reserves in liquid form (CRR and SLR) and gives CRR example where cash reserves are withheld from lending.
  • Notes statutory reserve ratio acts as a limit to credit creation, implying reserves are retained (i.e., kept liquid) rather than lent out.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.3 MONEY CREATION BY BANKING SYSTEM > p. 39
Presence: 4/5
“Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash. These reserves are kept partly as cash and partly in the form of financial instruments (bonds and treasury bills) issued by the RBI. Reserves are similar to deposits we keep with banks. We keep deposits and these deposits are our assets, they can be withdrawn by us. Similarly, commercial banks like State Bank of India (SBI) keep their deposits with RBI and these are called Reserves. Assets = Reserves + Loans Liabilities for any firm are its debts or what it owes to others.”
Why this source?
  • Explains reserves are deposits banks keep with the RBI and as cash and financial instruments (bonds, T-bills), highlighting their liquid nature.
  • Compares reserves to deposits that can be withdrawn, reinforcing the characterization of reserves as liquid holdings.
Statement 4
Are statutory reserve requirements in the Indian economy intended to prevent commercial banks from making excessive profits?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
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
Presence: 5/5
“In absence of the CRR and SLR requirements, to make more profits bank may lend most of the deposits and if there is a sudden rush to withdraw, banks will struggle to meet the repayments. All Commercial and Cooperative Banks (either scheduled or non-scheduled) are required to maintain CRR and SLR. For scheduled banks, the maintenance of CRR is governed through The Reserve Bank of India Act 1934 and for Non-Scheduled banks CRR is governed through Banking Regulation Act 1949. Banking Regulation Act 1949 (Section 24) governs maintenance of SLR for all banks (scheduled and non-scheduled) commercial and cooperative. 9.”
Why this source?
  • Explicitly states that without CRR and SLR banks 'to make more profits may lend most of the deposits', implying the requirements constrain profit‑motivated lending.
  • States all banks are required to maintain CRR and SLR, tying the regulatory requirement to preventing risky profit-seeking behavior that could threaten liquidity.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
Presence: 4/5
“Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.”
Why this source?
  • Explains CRR/SLR as percentages of deposits that must be held, leaving only the remainder for loans.
  • Explicitly says the statutory reserve requirement 'acts as a limit to the amount of credit that banks can create', which restricts banks' ability to expand profits via additional lending.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2 Money and Banking- Part I > p. 95
Presence: 3/5
“Scheduled Commercial Banks have achieved the minimum Basel III capital requirement. The higher the capital is above the regulatory minimum, the greater the freedom banks have to make loans. The closer bank capital is to the minimum, the less inclined banks are to lend. If capital falls below the regulatory minimum, banks cannot lend or face restrictions on lending. When loans go bad and turn into non-performing assets (NPAs) banks have to make provisions for potential losses (i.e., banks are required to keep certain funds in reserve which they can't lend and is called provisioning against NPAs). This tends to erode bank capital and put brakes on loan growth.”
Why this source?
  • Describes prudential rules (capital requirements and provisioning) that reduce banks' capacity to lend when regulatory buffers shrink.
  • Shows regulatory reserves and provisioning functionally constrain loan growth (and thus profit generation) when risks emerge.
Statement 5
Do statutory reserve requirements in the Indian economy force banks to hold sufficient vault cash to meet their day-to-day cash requirements?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
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
Presence: 5/5
“is called CRR. "In terms of Section 42(1) of the RBI Act, 1934 the Reserve Bank, having regard to the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate". Statutory Liquidity Ratio (SLR) The amount of reserves that the scheduled commercial banks are required to maintain with themselves on a daily basis in safe and liquid assets such as government securities, gold and cash with respect to their NDTL is called SLR. Excess CRR balances are also treated as liquid assets for the purpose of SLR i.e., SLR can be maintained as cash balance with RBI.”
Why this source?
  • Defines Statutory Liquidity Ratio (SLR) as reserves that banks must maintain with themselves in safe and liquid assets, explicitly including cash.
  • Says these reserves are required on a daily basis with respect to NDTL, implying a statutory requirement for holdings available to the bank (i.e., vault/onsite liquidity).
Understanding Economic Development. Class X . NCERT(Revised ed 2025) > Chapter 3: MONEY AND CREDIT > LOAN ACTIVITIES OF BANKS > p. 41
Presence: 4/5
“Let us take the story of banks further. What do the banks do with the deposits which they accept from the public? There is an interesting mechanism at work here. Banks keep only a small proportion of their deposits as cash with themselves. For example, banks in India these days hold about 5 per cent of their deposits as cash. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day. Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash.”
Why this source?
  • Explains that banks keep a small proportion of deposits as cash (vault cash) as a provision to meet depositors' withdrawals on any given day.
  • Links the operational practice of holding vault cash to meeting day-to-day cash demands, supporting the purpose of reserve holdings for daily liquidity.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
Presence: 4/5
“Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.”
Why this source?
  • Defines Cash Reserve Ratio (CRR) as the percentage of deposits a bank must keep as cash reserves, showing statutory force behind holding cash reserves.
  • Notes that statutory reserve ratios act as limits on banks' ability to create credit, indicating regulatory control over cash/reserve holdings.
Pattern takeaway: UPSC Economy questions often mix 'Core Mandates' with 'Operational Side-effects'. To solve, ask: 'What is the RBI's job description?' The answer is always Macro-stability, not micro-management of profits.
How you should have studied
  1. [THE VERDICT]: Sitter. Source: NCERT Class XII Macroeconomics, Chapter 3 (Money and Banking).
  2. [THE CONCEPTUAL TRIGGER]: Instruments of Monetary Policy. Specifically, the dual mandate of the RBI: Controlling Inflation (via Credit Control) and ensuring Financial Stability (via Prudential Norms).
  3. [THE HORIZONTAL EXPANSION]: Memorize the 'Liquidity Hierarchy': CRR (Cash with RBI, no return), SLR (Gold/G-Sec/Cash with self, earns return), Repo (Short-term injection), and the Money Multiplier formula (M = 1/R).
  4. [THE STRATEGIC METACOGNITION]: Always distinguish between 'Purpose' and 'Consequence'. The RBI's purpose is to secure deposits (Safety) and manage inflation (Control). Reduced bank profits (Statement 3) are a consequence, not a goal. Vault cash (Statement 4) is an operational detail, not the primary statutory definition.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
💡 The insight

CRR and SLR are the statutory reserve requirements cited as the direct tools that limit banks' lendable funds and thereby control advances.

High-yield for UPSC: questions often ask how RBI instruments influence credit and liquidity. Understanding definitions, operational impact (reduces lendable deposits) and policy uses helps answer both conceptual and application questions on monetary policy. Study approach: memorise definitions and practice numerical examples of how CRR/SLR change lendable funds.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  • 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
🔗 Anchor: "Do statutory reserve requirements in the Indian economy enable the Reserve Bank ..."
📌 Adjacent topic to master
S1
👉 Reserve requirements as a monetary policy tool
💡 The insight

References link reserve requirements to RBI’s regulation of money supply and control over bank credit creation.

Covers a common mains and prelims theme: instruments of RBI and their transmission to money supply. Mastering this helps in questions comparing quantitative tools (CRR/SLR) with rate tools (bank rate) and in evaluating policy decisions. Approach: map tools to their direct effects, and practice short essays explaining transmission mechanisms.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Box No. 3.2: Demonetisation > p. 49
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
  • 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
🔗 Anchor: "Do statutory reserve requirements in the Indian economy enable the Reserve Bank ..."
📌 Adjacent topic to master
S1
👉 Money creation process & role of reserves
💡 The insight

Evidence explains reserves banks hold with RBI and shows how reserve requirements restrict the amount banks can lend, constraining money creation.

Core concept for questions on money supply, multiplier effects and banking operations. UPSC often tests conceptual links between reserves, deposits, loans and high-powered money. Preparation: work through the reserve-to-loan numeric examples and relate to the money multiplier framework.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.3 MONEY CREATION BY BANKING SYSTEM > p. 39
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
🔗 Anchor: "Do statutory reserve requirements in the Indian economy enable the Reserve Bank ..."
📌 Adjacent topic to master
S2
👉 CRR and SLR as monetary policy instruments
💡 The insight

References identify Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as statutory reserve requirements used by RBI to control banks and affect deposit safety.

High-yield for UPSC: these are basic tools of monetary policy often asked in prelims and mains. They connect banking regulation, liquidity management, and macro policy topics. Master by understanding definitions, objectives (control credit, ensure liquidity), and real-world implications for banks' lending and deposit safety.

📚 Reading List :
  • 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
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
🔗 Anchor: "Are statutory reserve requirements in the Indian economy intended to make people..."
📌 Adjacent topic to master
S2
👉 Reserve requirement limits money creation (credit multiplier)
💡 The insight

Evidence repeatedly states statutory reserves restrict the amount banks can lend, capping money creation via the multiplier process.

Important conceptually for questions on money supply, multiplier effects, and transmission of monetary policy. Helps answer 'how' and 'why' RBI changes CRR/SLR, and to analyze policy impacts on credit and inflation. Learn via multiplier formulas and worked examples connecting CRR percentages to deposit/loan limits.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 42
🔗 Anchor: "Are statutory reserve requirements in the Indian economy intended to make people..."
📌 Adjacent topic to master
S2
👉 Reserves, liquidity cushion and depositor protection
💡 The insight

References link reserve requirements to ensuring banks have a cushion to meet withdrawals and to protecting depositors (reducing risk of bank runs/failures).

Crucial for questions on financial stability, banking regulation, and crisis management. Shows how microprudential rules intersect with macro policy (RBI interventions). Prepare by mapping reserve rules to depositor protection mechanisms and RBI safety-net tools.

📚 Reading List :
  • 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
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Management of Foreign Exchange Reserves > p. 69
🔗 Anchor: "Are statutory reserve requirements in the Indian economy intended to make people..."
📌 Adjacent topic to master
S3
👉 CRR and SLR — definitions & liquidity role
💡 The insight

Both CRR and SLR are statutory reserve requirements in the references and are described in terms of reserves held in liquid assets or cash.

High-yield for UPSC macroeconomics/Indian economy: these are core monetary policy tools often asked in definitions and application questions. They link to banking liquidity, credit control and central bank operations. Master by learning precise definitions, examples and policy implications.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  • 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
🔗 Anchor: "Are statutory reserve requirements in the Indian economy intended to make people..."
🌑 The Hidden Trap

The 'Money Multiplier' (1/Reserve Ratio). The NCERT page discussing Reserve Requirements immediately follows up with how they mathematically limit credit creation. If CRR goes up, the Multiplier goes down. This mathematical relationship is the logical sibling to the theoretical question asked here.

⚡ Elimination Cheat Code

The 'Benevolent Regulator' Filter. Policy objectives are almost always constructive (Safety, Stability, Liquidity). Statement 3 ('Prevent excessive profits') implies a punitive or negative intent. Regulators regulate to protect the system, not to punish profit-making. If an option sounds spiteful, it's likely a trap.

🔗 Mains Connection

Mains GS-3 Link: 'Financial Repression'. High Statutory Reserves (especially SLR) force banks to buy Government Securities, effectively financing the Fiscal Deficit at low rates. This crowds out private investment. Use this to link Monetary Policy tools to National Fiscal Health in Mains answers.

✓ Thank you! We'll review this.

SIMILAR QUESTIONS

IAS · 2016 · Q71 Relevance score: 0.07

What is/are the purpose/purposes of Government's 'Sovereign Gold Bond Scheme' and 'Gold Monetization Scheme'? 1. To bring the idle gold lying with Indian households into the economy 2. To promote FDI in the gold and jewellery sector 3. To reduce India's dependence on gold imports Select the correct answer using the code given below.

IAS · 2015 · Q22 Relevance score: -0.27

When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?

IAS · 2013 · Q17 Relevance score: -0.29

The Reserve Bank of India regulates the commercial banks in matters of 1. Liquidity of assets 2. Branch expansion 3. Merger of banks 4. Winding-up of banks Select the correct answer using the codes given below.

IAS · 2021 · Q25 Relevance score: -0.42

In India, the central bank's function as the 'lender of last resort' usually refers to which of the following? 1. Lending to trade and industry bodies when they fail to borrow from other sources 2. Providing liquidity to the banks having a temporary crisis 3. Lending to governments to finance budgetary deficits Select the correct answer using the code given below.

IAS · 2012 · Q100 Relevance score: -0.46

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: