Static Quiz 03 February 2024 (Economy) 

Types of Accounts:

1. Current Account: It is always a demand deposit A/c and the bank is obliged to pay the money on demand. There is no limit on number of transactions and value of transactions and these are the most liquid deposits. Current account is used mainly for business purpose/ companies and never used for saving purpose. No interest is paid by banks on these accounts and the banks charge certain service charge on these accounts. Banks provide convenient operational facilities on these accounts and also issue chequebooks.
2. Savings Account: This account is mainly for individuals. These are also demand deposits but there are restrictions on the number of transactions and the value of transactions during a specified period. Banks generally prescribe minimum balances in the accounts in order to offset the cost of maintaining and servicing such deposits. The deposits in these accounts earn interest.

Money Supply:

In an economy, money consists of mainly currency notes, coins and deposits of public in banks. In India coins and currency notes are issued for circulation by the Reserve Bank of India (RBI), which is the monetary authority (or Central Bank) in India. One-rupee note and all coins and subsidiary coins, the magnitude of which is relatively small, are minted/printed by the Government of India, while all the other currency notes are printed by the RBI. All the currency notes and coins are put into circulation only through the RBI, which is the sole authority for the issue of currency and coins in India.

Currency = Notes + Coins
Currency in Circulation = Currency with the Public + Currency with the banks

Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.

Reverse Repo Rate = Repo Rate – 0.65%

How can a Tight Liquidity Condition Impact Consumers?
 A tight liquidity condition could lead to a rise in the government securities yields and subsequently lead to a rise in interest rates for consumers too.
 RBI may increase Repo Rate, which can lead to a higher cost of funds.
 Banks will increase their repo-linked lending rates and the marginal cost of funds-based lending rate (MCLR), to which all loans are linked to. This rise will result in higher interest rates for consumers.
o The MCLR is the minimum interest rate that a bank can lend at.

Statutory Liquidity Ratio (SLR) The amount of reserves that the scheduled commercial banks are required to maintain with themselves on a daily basis in safe and liquid assets such as government securities, gold and cash with respect to their NDTL is called SLR. Excess CRR balances are also treated as liquid assets for the purpose of SLR. Scheduled Commercial Banks are required to maintain SLR as per the Banking Regulation Act 1949. The maximum limit for SLR is 40%.
All Commercial and Cooperative Banks (either scheduled or non-scheduled) are required to maintain CRR and SLR. For scheduled banks, the maintenance of CRR is governed through The Reserve Bank of India Act 1934 and for Non-Scheduled banks CRR is governed through Banking Regulation Act 1949. Banking Regulation Act 1949 (Section 24) governs maintenance of SLR for all banks (scheduled and non-scheduled) commercial and cooperative.