The cash reserve ratio refers to the portion of a bank's deposits that must be
- A.Kept as cash with the Reserve Bank of India
- B.Invested in shares of listed companies
- C.Held by the bank itself in gold and approved securities
- D.Lent to the priority sector
Correct answer
Explanation
The correct answer is A, kept as cash with the Reserve Bank of India. The cash reserve ratio is the share of a bank's net demand and time liabilities that it must maintain as cash balances with the Reserve Bank. The balance earns the bank nothing, so a rise in the ratio takes money out of the bank's lending pool and tightens credit, while a cut releases funds.
Option C describes the statutory liquidity ratio, which is held by the bank with itself in cash, gold or approved securities and does earn a return; this is the most common confusion in the chapter. Option B is wrong because banks cannot be required to hold reserves in company shares, which carry market risk. Option D describes priority sector lending, under which a prescribed share of adjusted net bank credit must go to agriculture, small enterprises, education, housing and weaker sections. Remember the one-line separation: cash reserve ratio with the Reserve Bank, statutory liquidity ratio with the bank itself.
Read the full article: Money and Banking in India: RBI, Supply and Policy
Practice Questions
View allThe Reserve Bank of India began its operations on which date?
- A.1 April 1935
- B.1 January 1949
- C.1 July 1955
- D.19 July 1969
Show answer
The Reserve Bank of India was constituted under the Reserve Bank of India Act of 1934, on the recommendation of the Hilton Young Commission, and started functioning on 1 April 1935 with its central office at Calcutta, which was shifted permanently to Bombay in 1937.
Read the full explanation →In the measurement of money supply in India, which aggregate is known as broad money?
- A.M0
- B.M1
- C.M3
- D.M4
Show answer
M3 is M1 plus time deposits with banks, and it is called broad money or the aggregate monetary resource. It is the measure the Reserve Bank follows most closely because it captures both spendable balances and funds held for a fixed term.
Read the full explanation →The repo rate is the rate of interest at which
- A.Commercial banks lend to their prime customers
- B.The Reserve Bank lends short-term funds to banks against government securities
- C.The Reserve Bank borrows surplus funds from commercial banks
- D.Banks pay interest on savings deposits
Show answer
In a repurchase or repo transaction a bank sells government paper to the Reserve Bank and agrees to buy it back shortly afterwards at a slightly higher price; the difference works out as interest at the repo rate.
Read the full explanation →How many commercial banks were nationalised in India in the first round of bank nationalisation in July 1969?
- A.Six
- B.Twelve
- C.Fourteen
- D.Twenty
Show answer
On 19 July 1969 the government nationalised fourteen of the largest commercial banks in the country, the aim being to take banking to rural areas, direct credit to agriculture and small industry, and end the concentration of bank funds in a few business houses.
Read the full explanation →In India, the one rupee note is issued by
- A.The Reserve Bank of India
- B.The State Bank of India
- C.The Government of India
- D.The Security Printing and Minting Corporation
Show answer
The one rupee note and all coins are issued by the Government of India through the Ministry of Finance, and the one rupee note carries the signature of the Finance Secretary rather than that of the Governor of the Reserve Bank.
Read the full explanation →