What is the Significance of Centralized Cash Reserves With Central Bank?

Question

What is the Main Role of Centralised Cash Reserves With Central Bank?

Answer 1

Two observation need to be noted in the significance of centralised cash reserves with Central Bank.

• Centralised Cash reserves enable the Reserve Bank of India (RBI) to offer financial help to the commercial bank during emergencies. It is called 'financial accommodation' by the RBI. Banks get financial accommodation (or financial help) in times of Emergency.
• Centralised Cash reserves enable the Reserve Bank of India (RBI) to exercise control over the commercial bank. Because these reserves depend on CRR (fixed by RBI in India) and by varying the CRR, the RBI can increase or decrease the credit creation capacity of the Commercial Bank. Accordingly, money supply in the economy is regulated.