Difficulty: Easy
Correct Answer: Banking and monetary policy
Explanation:
Introduction / Context:
Cash Reserve Ratio CRR and Statutory Liquidity Ratio SLR are important tools used by the Reserve Bank of India to regulate liquidity and credit in the economy. This question checks whether you know the domain where these ratios are applied. Although the terms sometimes appear in news articles about markets in general, they are specifically part of banking regulation and monetary policy. For finance and bank interview exams, correctly linking CRR and SLR to the banking sector is a basic but very important concept.
Given Data / Assumptions:
Concept / Approach:
CRR is the percentage of a bank total demand and time liabilities that must be kept as cash reserves with the central bank. SLR is the percentage of a bank net demand and time liabilities that must be maintained in the form of cash, gold, or approved securities. Both ratios directly affect how much money commercial banks can lend and therefore are powerful instruments of monetary control. They are not definitions used for mutual funds, direct taxation, or stock exchange operations. Therefore, the correct domain is banking and monetary policy, which is described by the option that mentions banking.
Step-by-Step Solution:
Step 1: Recall that CRR is a mandatory cash reserve that banks maintain with the central bank, expressed as a percentage of their deposits.Step 2: Recall that SLR is the minimum percentage of deposits that banks must hold in liquid assets such as cash, gold, or government approved securities.Step 3: Note that both ratios directly limit the amount of money that commercial banks can use for lending activities.Step 4: Compare this understanding with each option. Mutual funds and stock exchanges deal with investments and trading, not with reserve ratios for banks. Income tax is related to government tax collection, not reserve requirements.Step 5: Conclude that these terms belong to the banking sector and are tools of monetary policy, so the option mentioning banking is the correct one.
Verification / Alternative check:
A quick cross check is to remember newspaper headlines about RBI changing CRR or SLR to absorb surplus liquidity or inject liquidity into the banking system. Such changes are always discussed in relation to commercial banks, credit growth, and interest rates. You will rarely see CRR or SLR mentioned in the context of stock exchange trading rules, taxation laws, or mutual fund regulations. This confirms that the correct domain is banking and monetary policy.
Why Other Options Are Wrong:
Option A is incorrect because mutual funds are governed mainly by securities regulations and guidelines issued by SEBI, not by CRR and SLR. Option B is wrong because income tax is managed by the tax department under the Income Tax Act and does not use CRR or SLR as technical terms. Option C is incorrect because stock exchanges function under securities laws and trading rules; while banking liquidity can indirectly affect market behaviour, CRR and SLR are not stock exchange specific concepts. Only option D correctly links these ratios to banking and monetary policy.
Common Pitfalls:
Students sometimes associate any financial ratio with capital markets or taxation and quickly guess stock exchange or income tax. Another mistake is to confuse SLR with terms like security lending and borrowing because of similar letters. In exams, always focus on the full form of the acronym and recall which regulator uses the term. CRR and SLR appear in RBI notifications and monetary policy statements, which clearly connect them with banking regulation rather than direct taxation or mutual funds.
Final Answer:
Cash Reserve Ratio CRR and Statutory Liquidity Ratio SLR are terms most closely related to the banking industry and monetary policy.
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