Question : The minimum amount that a commercial bank is required to maintain with the central bank is known as ___________.
Option 1: Cash reserve ratio (CRR)
Option 2: Statutory liquidity ratio (SLR)
Option 3: Repo rate
Option 4: Reverse repo rate
Correct Answer: Cash reserve ratio (CRR)
Solution : The correct answer is (a) Cash reserve ratio (CRR).
The cash reserve ratio is the minimum amount of funds that commercial banks are required to maintain as reserves with the central bank. It is a percentage of their net demand and time liabilities, which includes deposits and certain other liabilities. By setting the CRR, the central bank controls the liquidity and cash reserves of commercial banks.
The purpose of the CRR is to ensure that commercial banks have a certain level of liquidity to meet depositor withdrawals and maintain stability in the banking system. By adjusting the CRR, the central bank can influence the lending capacity and money supply in the economy. When the central bank raises the CRR, it reduces the funds available for lending by commercial banks, thus reducing the money supply. Conversely, when the central bank lowers the CRR, it increases the funds available for lending, thereby increasing the money supply.
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