Question

That portion of a bank’s total deposits which the bank keeps in cash to pay to its depositors is called

• A. Statutory liquidity ratio
• B. Cash reserve deposit ratio
• C. Open market operation
• D. None of these

Hint:

The CRR is a tool used by central banks to control inflation and the money supply in an economy by regulating the amount of funds banks must hold in reserve.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The portion of a bank’s total deposits that is kept in reserve, either as cash or in the form of deposits with the central bank, is known as the cash reserve. This reserve is meant to meet the demand of depositors who wish to withdraw their funds.
Step 2: Key Terms and Their Explanation:
- Statutory liquidity ratio (SLR): This is the minimum percentage of a commercial bank's net demand and time liabilities (NDTL) that it must maintain in the form of liquid cash, gold, or other approved securities. It is set by the central bank to ensure the liquidity and solvency of the banking system.
- Cash reserve deposit ratio (CRR): This refers to the percentage of a bank’s total deposits that it is required to keep in the form of cash reserves with the central bank. It is primarily used to control the money supply and ensure the bank’s ability to meet withdrawal demands.
- Open market operation (OMO): These are the buying and selling of government securities in the open market by the central bank to regulate the money supply. While OMOs influence liquidity, they are not directly related to the reserves kept by individual banks. Step 3: Conclusion:
The correct answer is the cash reserve deposit ratio (CRR), as it directly relates to the portion of deposits that banks must keep in cash to meet the demands of their depositors.