2014 GS Paper I, all questions

UPSC Prelims 2014 · GS Paper I

Question 33: Economy and Social Development

In the context of Indian economy, which of the following is/are the purpose/purposes of 'Statutory Reserve Requirements'?

  1. 1.To enable the Central Bank to control the amount of advances the banks can create
  2. 2.To make the people's deposits with banks safe and liquid
  3. 3.To prevent the commercial banks from making excessive profits
  4. 4.To force the banks to have sufficient vault cash to meet their day-to-day requirements

Select the correct answer using the code given below.

a1 only
b1 and 2 only
c2 and 3 only
d1, 2, 3 and 4

AnswerUPSC’s answer is (a).

Statutory Reserve Requirements are the Cash Reserve Ratio (cash kept with the Reserve Bank) and the Statutory Liquidity Ratio (liquid assets such as government securities kept by the bank). Their main purpose is monetary control: raising or lowering them changes how much banks can lend, so the central bank can control credit creation. They are not meant to cut bank profits, and vault cash needs are separate from these requirements. UPSC counts only statement 1 as correct.

  • 1. Varying the reserve ratios controls the banks' power to create credit.
  • 2. UPSC does not accept deposit safety and liquidity as the purpose.
  • 3. Preventing excessive profit is not a purpose.
  • 4. Vault cash needs are not what these ratios are for.

How you could have got this

  1. If you were sure statement 2 is not correct, (b), (c) and (d) go: each of them includes 2.

    What you needed to know: UPSC does not accept deposit safety and liquidity as the purpose.

Only (a) is left. You didn’t need statements 1, 3 or 4.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Right. UPSC counts only credit control by the central bank as the purpose.
  • (b) Wrong. UPSC does not treat statement 2, deposit safety, as the purpose of the requirements.
  • (c) Wrong. Curbing bank profits (statement 3) is not a purpose, and UPSC does not accept statement 2.
  • (d) Wrong. Statements 3 and 4 are not purposes.

Worth knowing: Statement 2 is arguable because reserves do add safety and liquidity, but UPSC's key accepts only statement 1.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2014, General Studies Paper I, Series A. The paper on upsc.gov.in.