The Primary Reserve Requirement

The Primary Reserve Requirement: The primary or cash reserve requirement is the principal direct monetary policy instrument used by the Central Bank to influence monetary conditions.  All licensed financial institutions are required to maintain a fraction of their deposit liabilities in a non-interest earning cash reserve account with the Bank.  By lowering or increasing this fraction, the Bank can increase or reduce liquidity in the banking system.  This instrument, which was first introduced in 1966 for commercial banks, was extended to the non-bank financial institutions in 1981.  The primary reserve requirement ratio currently stands at 10 per cent for commercial banks and 9 per cent for the non-banks.  The Central Bank regularly monitors the cash balances of the banks and non-banks to ensure that these institutions meet their statutory requirements.  There is a stipulated cash penalty for failure to adhere to the reserve requirements.