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| 1. |
Explainthe "varyingreserverequirements " method of creditconrtalby thecentral bank. |
| Answer» Solution :When it is sought to restrict credit, the Central Bank may raise the reserve ratio. In 1960, for instance, the Reserve Bank of India REQUIRED the scheduled banks to maintain with it additional reserve equivalent to 25% of the increase in their bank deposits (later raised to 50%).The Reserve Bank has also the power to vary the CASH reserve ratio (CRR) which the banks have to maintain with it from the minimum requirement of 3% up-to 15% of the aggregate liabilities (7% since June 1982) raised in stages to 8.5% effective from August 27, 1983.Variations of reserve requirements affect the LIQUIDITY position of the banks and hence their ability to LEND. The raising of reserve requirements is an anti-inflationary measure inasmuch as it reduces the excess reserves of member-banks for potential credit expansion. The lowering of the reserve ratios has the opposite effect. | |