Question

What is the significance of centralised cash reserves with central bank?

Answer 1

Two observations need to be noted in this context:

(i) Centralised cash reserves enable the RBI to offer financial help to the commercial banks during emergencies. It is called 'financial accommodation' by the RBI. Banks get financial accommodation (or financial help) in times of emergency.

(ii) Centralised cash reserves enable the RBI to exercise control over the commercial banks. Because these reserves depend on CRR (fixed by RBI in India), by varying the CRR, the RBI can increase or decrease the credit creation capacity of the commercial banks. Accordingly, money supply in the economy is regulated.