Write short notes on
(a) Liquidity Ratio.
(b) Fixed Deposits.
(c) Money Market.
Explanation
(a) Liquidity ratio: The commercial banks are required by the law to keep a specified proportion of their total deposits with the Central Bank in the form of bank reserves, usually 25% of their total deposits. The size of the reserve can be raised or lowered according to the economic exigences of the country. If the Central Bank needs to adopt a credit squeeze stance, it would raise the reservation. If the Central needs to adopt an expansionist policy, it would lower the legal reserve ratios of the commercial banks.
(b) Fixed deposits: This is operated by people who can afford to keep their money in the bank for reasonable long period without making any withdrawal from the account. The period can extend up to a year or more. Individuals , firms and government use fixed deposit account for keeping money they do not need at present. The customer receives a higher interest rate than on the ordinary savings account. Before the money in fixed deposit account is withdrawn, the bank must be given between 7 to 14 days notice.
(c) Money market: This is a market for short terms loans. The loan granted can be demanded at short notice. The money market is made up of the following institutions : Commercial banks, Central Bank, Discount houses and Bill brokers.