RESERVE SYSTEMS:
These are the mechanisms and policies that regulate the money supply in the banking system and hence liquidity in the economy.
Proportional Reserve System:
- This system was prevalent before 1956 .
- RBI has to maintain certain amount in the form of reserves as proportional reserve against the issued currency .
- This reserve consist of not less than 2/5th of the Gold or sterling securities, and the value of Gold was not less than Rs. 40 Crores in value.
- Remaining 3/5th of the assets might be rupee coins.
Minimum Reserve system:
- In 1956, Proportional Reserve System was replaced and Minimum Reserve system was adopted by RBI.
- In Minimum Reserve system, RBI is supposed to maintain a Gold and Foreign Exchange Reserves of Rs. 200 Crore of which at least Rs. 115 Crore should be in Gold.
- It simply means that issuance of currency is not backed by any asset.
- This system continues till date.
The fractional reserve banking system:
- Banking method in which only a fraction of the deposits are kept as reserves by the banks as a mandatory requirement.
- Rest of the amount is given to the people as loans.
- Disbursement of the loans expand the money supply and facilitate economic growth.
- Fractional Reserve system results in Money Multiplier
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