Recent ratio variation policy: According to the prevailing law, commercial banks have to keep a certain amount of money from the total reserve. When central bank controls credit by an increase or decreases the reserve ratio rate, is known as reserve ratio variation policy. Sometimes commercial banks supply excessive money in the market and create inflation. When central bank realizes that commercial banks are liable for the inflation, then it increases statutory reserve ratio. Then commercial banks have to keep more money as a reserve in the central bank and it reduces the credit giving the power of commercial banks. Again, when there is a shortage of credit central bank does the opposite thing. In this way of increase and decrease of reserve rate, central bank tries to keep the balance of supply of money in the market.
Limitations: There are some limitations in reserve ratio variation policy-
- If there are alternatives ways of credit, it creates no impact on reserve ratio policy.
- In rural or in some certain area it has no impact.
- Sometimes bank, keep deposit in foreign banks; they take that money in need,
- Central Bank must have firm control over commercial banks otherwise reserve ratio policies do not work.
