Question

All commercial banks have to maintain a minimum cash balance which is known as Cash Reserve Ratio. Amount of fund available with commercial banks to be given as loans increases or decreases whenever RBI changes the CRR. In order to maintain the CRR, all banks borrow from each other on which interest rate is also paid by the respective banks.

i) Which money market investment is discussed above?

a) Treasury Bills
b) Certificate of Deposit
c) Call Money
d) Commercial Paper

Answer 1

The money market investment where banks borrow from each other for maintaining the CRR is Call Money. Banks must hold a certain percent of depositors' funds as reserves that can't be lent out. The federal funds rate is the interest charged for these interbank loans.

Step-by-step explanation:

The money market investment that is being discussed, where banks borrow from each other to maintain a minimum cash balance known as the Cash Reserve Ratio (CRR), is referred to as Call Money. Banks are required to meet this reserve requirement, which is a certain percentage of depositors' money that they must retain as cash within the bank or at the central bank, and not use for loans or investments. If the central bank, such as the RBI in India or the Federal Reserve in the US, adjusts the CRR, it directly affects the amount of funds banks have to provide as loans. When banks borrow from each other to meet these requirements, they do so at an interest rate known as the federal funds rate.

Banking regulation, including reserve requirements, is one way governments seek to influence bank behavior and maintain solvency by limiting risk and ensuring a portion of depositor's money is readily available. These regulations impact how much money a bank can lend out and form part of the broader systems that govern bank operations and stability.