Which of the following statements is correct with reference to the Ca…

Which of the following statements is correct with reference to the Cash Reserve Ratio (CRR)?

A. The RBI decides a certain percentage of deposits which every bank must keep as reserves with the central bank

B. To ensure that no bank is 'over lending'

C. This is a legal requirement and is binding on the banks

D. Cash Reserve Ratio and Statutory Liquidity Ratio are the same concept.

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → (A), (B) and (C) only

Commercial banks create money by lending, but there is a limit to it, and the RBI sets this limit.

A. The RBI decides a certain percentage of deposits which every bank must keep as reserves with the central bank — Correct. This percentage is the Cash Reserve Ratio (CRR): the share of deposits that a bank must keep as cash reserves.

B. To ensure that no bank is 'over lending' — Correct. Money kept as reserves cannot be lent out. So CRR limits how much a bank can lend.

C. This is a legal requirement and is binding on the banks — Correct. A bank must keep this reserve even if it would rather lend the money, so it has no choice in the matter.

D. Cash Reserve Ratio and Statutory Liquidity Ratio are the same concept. — Incorrect. The Statutory Liquidity Ratio (SLR) is a separate ratio. Apart from the CRR, banks must also keep some reserves in liquid form in the short term.

NCERT (2026-27): “3.3.2 Limits to Credit Creation and Money Multiplier … But is there a limit to money or credit creation by banks? Yes, and this is determined by the Central bank (RBI). The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is ‘over lending’. This is a legal requirement and is binding on the banks. This is called the ‘Required Reserve Ratio’ or the ‘Reserve Ratio’ or ‘Cash Reserve Ratio’ (CRR).

Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank.

Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR.…”