UPSC Prelims 2014 · Question 13 of 100
UPSC Prelims 2014 question on Statutory Reserve Requirements
- ExamUPSC CSE
- Year2014
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicBanking
- DifficultyMedium
- TypeStatement
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.
Show answer
Answer: B. 1 and 2 only
Verdict
The answer is 1 and 2 only. Statutory reserve requirements exist to give the central bank a lever over credit creation and to keep depositors' money safe and liquid.
Analysis
Statement 1 is CORRECT. Because reserves lock away part of the deposit base, raising them directly shrinks the volume of advances a bank can create, which is the central bank's classic quantitative tool. Statement 2 is CORRECT. Reserves are a cushion that ensures the institution can meet obligations arising from accepting deposits, including in a calamitous situation. Statement 3 is INCORRECT. Curbing bank profits is not an objective of prudential regulation, even though reserves do reduce earning assets as a side effect. Statement 4 is INCORRECT because of the words vault cash: statutory reserves are largely held with the central bank or in prescribed securities, not as cash in the branch for day to day counter needs.
Source
NCERT Economics.
How to crack it
Separate an instrument's purpose from its side effects. Reserves do dent profits, but that is a consequence, not an aim, and UPSC repeatedly builds a wrong statement out of a true side effect. Then read the operative noun in the last statement. Vault cash is not the same as reserves with the central bank, and a single misplaced technical noun is enough to falsify an otherwise reasonable sentence.