ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Banks in India hold around 15% as cash with themselves and with the RBI. This cash deposit is known as ‘reserve’. This helps to ensure that there is money available to the people even if there are large spendings by the bank.

Detailed explanation-2: -For example, banks in India these days hold about 15 per cent of their deposits as cash. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.

Detailed explanation-3: -The RBI provides a specific CRR for each commercial bank in the nation. Each bank will be asked to retain a specific amount of its deposits in the current account of the central bank. The RBI has the authority to set the cash reserve ratio between 3% and 15%.

Detailed explanation-4: -Cash Reserves Ratio (CRR) refers to the proportion of total deposit of the commercial banks which they must keep as reserves with the central bank in the form of cash deposits.

Detailed explanation-5: -And secondly, there will be constant flow of new deposits into the banks every day. So, to meet the daily demand for withdrawal of cash, it is sufficient for banks to keep only a fraction of deposits as cash reserve.