Effect of SLR reduction by RBI UPSC Prelims PYQ 2015
When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
- India’s GDP growth rate increases drastically
- Foreign Institutional Investors may bring more capital into our country
- Scheduled Commercial Banks may cut their lending rates
- It may drastically reduce the liquidity to the banking, system
Explanation
Option (c) is likely to happen
- The Statutory Liquidity Ratio (SLR) is the proportion of a bank’s net demand and time liabilities (NDTL) that must be maintained in the form of liquid assets like government securities, cash, or gold before providing credit.
- When the SLR is reduced, it frees up additional funds for Scheduled Commercial Banks, allowing them to lend more to businesses and individuals. This increased availability of funds typically leads to a reduction in lending rates, as banks now have more liquidity to deploy. While this may support GDP growth and attract investments indirectly, these outcomes are not immediate or guaranteed. The reduction in SLR directly impacts the cost and availability of credit in the banking system.
Answer: (c) Scheduled Commercial Banks may cut their lending rates; Difficulty Level: Easy
