Consider the following statements:
(A) The Reserve Bank of India changes the cash reserve ratio from time to time.
(B) A change in the cash reserve ratio affects the amount of funds available to be given as loans by commercial banks.
(C) Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio.
(D) The interest rate paid on call money loans is known as the discount.
(E) There is a direct relationship between call rates and other short-term money market instruments such as commercial paper.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (C) only
(A) The Reserve Bank of India changes the cash reserve ratio from time to time. — Correct. The Reserve Bank of India changes the cash reserve ratio from time to time.
(B) A change in the cash reserve ratio affects the amount of funds available to be given as loans by commercial banks. — Correct. A higher ratio leaves banks less cash to lend, so the change affects the funds available for loans.
(C) Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. — Correct. Banks borrow from each other through call money to keep the cash reserve ratio.
(D) The interest rate paid on call money loans is known as the discount. — Incorrect. The interest rate on call money loans is the call rate. Discount is the gain on a treasury bill.
(E) There is a direct relationship between call rates and other short-term money market instruments such as commercial paper. — Incorrect. The relationship is inverse, not direct.
NCERT (Pre-rationalised Edition): “3. Call Money: Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio. The Reserve Bank of India changes the cash reserve ratio from time to time which in turn affects the amount of funds available to be given as loans by commercial banks. Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. The interest rate paid on call money loans is known as the call rate. It is a highly volatile rate that varies from day-to-day and sometimes even from hour-to-hour. There is an inverse relationship between call rates and other short-term money market instruments such as certificates of deposit and commercial paper. A rise in call money rates makes other sources of finance such as commercial paper and certificates of deposit cheaper in comparison for banks raise funds from these sources.” |