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Question
Explain Statutory Liquidity Ratio.
Answer in Brief
Solution
- Commercial banks also have to keep a certain percentage of their demand and time liabilities in a liquid form, consisting of cash and government securities.
- When the central bank wants to reduce the volume of credit, it raises the statutory liquidity ratio. As a result, commercial banks have to keep more liquid assets, and their capacity to grant credit is reduced. Similarly, the central bank can expand credit by reducing the statutory liquidity ratio.
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Credit Control by Central Bank
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