BANKING AFFAIRS

BANKING GENERAL KNOWLEDGE

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

We suppose that Reserve Bank of India would like to increase the cash Reserves of the commercial banks. Which among the following would be most appropriate action of the RBI to achieve this aim?

A	RBI would release gold form its reserves
B	RBI would raise the reserve ratio
C	RBI would buy the bonds in the open market
D	RBI will stop the transactions which involve the bills of exchange

Explanation:

Detailed explanation-1: -At the time of high inflation, the government needs to ensure that excess money is not available in the economy. To that extent, RBI increases the Cash Reserve Ratio and the amount of money that is available with the banks reduces.

Detailed explanation-2: -When the RBI decides to increase the Cash Reserve Ratio, the amount of money that is available with the banks reduces. This is the RBI’s way of controlling the excess flow of money in the economy.

Detailed explanation-3: -Detailed Solution. The correct answer is It will increase. Cash Reserve Ratio (C. R. R.) refers to the number of money banks have to keep with the central bank. If RBI reduces the cash reserve ratio, credit creation will increase.

Detailed explanation-4: -If RBI conducts a sale of securities, it absorbs liquidity in the economy thereby reducing Cash Reserves in commercial banks.

There is 1 question to complete.