Prelims 2014 · archive
MediumIn 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.
Answer & explanation
Answer: (b) 1 and 2 only
Statutory reserves (CRR and SLR) are a legal limit on how much banks can lend out of their deposits. This lets the RBI control credit creation. The same reserves keep part of depositors' money in cash or liquid form, so banks can repay on demand. They are not meant to cap bank profits or to fill bank vaults.
- ✓ 1. The RBI fixes the share of deposits that banks must hold as reserves, so that no bank over-lends. This puts a ceiling on credit and money creation. Changing the ratio changes bank lending and the money supply.
- ✓ 2. Depositors keep money in a bank only if they are confident of getting it back on demand. Holding part of deposits as a balance with the RBI (CRR) and in liquid assets (SLR) supports that confidence. SLR is a prudential measure, and banks can draw on SLR holdings to borrow from the RBI in a liquidity crunch.
- ✗ 3. Reserve requirements are not designed to cap profits. A bank's profit comes from the spread between the interest it charges borrowers and the interest it pays depositors. Reserve rules do not set a ceiling on that spread.
- ✗ 4. CRR is kept as a balance with the RBI, not as cash in the bank's own vault. SLR is held mainly in government and approved securities. Neither exists to ensure vault cash for day-to-day needs.
Remember · CRR and SLR cap banks' over-lending, so the RBI can control credit and money supply. They also protect depositors' liquidity. They are not profit controls or vault-cash rules.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is 'over lending'.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “being able to repay depositors on demand is crucial to the bank's survival. Depositors would keep their funds in a bank only if they are fully confident of getting them back on demand.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “The interest rate paid by the banks to depositors is lower than the rate charged from the borrowers. This difference between these two types of interest rates, called the 'spread' is the profi”
- RBI – Monetary Policy overview (CRR and MSF definitions) ↗ “The penal rate at which banks can borrow, on an overnight basis, from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit (2 per cent).”
- Indian Economic Service (Arthapedia) – Statutory Liquidity Ratio ↗ “The Statutory Liquidity Ratio (SLR) is a prudential measure under which (as per the Banking Regulations Act 1949) all Scheduled Commercial Banks in India must maintain an amount”
Question: UPSC Civil Services (Preliminary) 2014, General Studies paper. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·