UPSC Prelims 2015 Question:

When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?

Explanation:

• Statutory Liquidity Ratio (SLR) is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. These are not reserved with the Reserve Bank of India (RBI) but with banks themselves. The SLR is fixed by the RBI. The SLR was prescribed by Section 24 (2A) of Banking Regulation Act, 1949.
  
  

• CRR (Cash Reserve Ratio) and SLR have been the traditional tools of the Central Bank's monetary policy to control credit growth, flow of liquidity and inflation in the economy. When RBI decreases SLR, banks get more money to lend to their customers, it provides them stability and the ability to decrease lending rates.
  
  

Therefore, option (3) is the correct answer.

Subject: Economics | Money and Banking