When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points which of the following is likely to happen?
[UPSC Civil Services Exam – 2015 Prelims]
(a) India’s GDP growth rate increases drastically
(b) Foreign Institutional Investors may bring more capital into our country
(c) Scheduled Commercial Banks may cut their lending rates
(d) It may drastically reduce the liquidity to the banking system
Answer: (c)
Explanation:
- SLR is a mechanism used by RBI to regulate the liquidity of assets and requires the banks to invest a certain portion of their deposits in RBI-approved securities or gold.
- When SLR is reduced, banks have more money to lend which may lead to a decrease in lending rates.
- By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.
- Ensuring the solvency of commercial banks.
- By reducing the level of SLR, the RBI can increase liquidity with the commercial banks, resulting in increased investment.
- This is done to fuel growth and demand.
- Hence, option 3 is correct.
