Money and banking

Indian Economy (CDS)

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Indian Economy - Understanding the basics of Indian economic system

Consider the following statements:

1. The Currency Deposit Ratio is the proportion of the total deposits that commercial banks keep as reserves.

2. The Reserve Deposit Ratio is the ratio of money held by the public in currency to that held in bank deposits.

Which of the statements given above are incorrect ?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

Statement 1 is incorrect: The currency deposit ratio (CDR ) is the ratio of money held by the public in currency to that held in bank deposits.

It reflects people’s preference for liquidity.

It is a purely behavioural parameter that depends, among other things, on the seasonal pattern of expenditure.

For example, CDR increases during the holiday season as people convert deposits to cash balances to meet extra expenditure during such periods.

Statement 2 is incorrect: Reserve deposit ratio (RDR) is the proportion of the total deposits commercial banks keep as reserves.

Reserve money consists of two things: vault cash in banks and the deposits of commercial banks with the RBI.

Banks use this reserve to meet the demand for cash from account holders.