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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
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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
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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.
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Statement analysis

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Statement analysis

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Statement analysis

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