Statement 1: Reserve Bank of India keeps a certain percentage of deposits of commercial banks as reserve to avoid too much lending to public.
Statement 2: The reserve deposit ratio acts as a deterrence to the amount of credit created by the commercial banks.
(a) Statement 1 is true and Statement 2 is false
(b) Statement 2 is true and Statement 1 is false
(c) Both the Statements are true
(d) Both the statements are false
Ans – (c)
Statement 1 and 2 are true as the Reserve Bank of India keeps a certain percentage of deposits of commercial banks as reserve in the form of CRR to avoid to much lending to the public.
This reserve ratio is called the Cash Reserve Ratio and acts as a control to the amount of credit created by the commercial banks.
This Reserve is called
Cash Reserve Ratio (CRR): It refers to the minimum percentage of net demand and time liabilities, to be kept by commercial banks with the central bank.
A change in CRR affects the ability of commercial banks to create credit.
For instance, an increase in CRR reduces the excess reserves of commercial banks and limits their credit-creating power.