RBI cuts SLR by 1 percent
New Delhi, July 31 (IANS) The Reserve Bank of India (RBI) Tuesday announced a reduction in the statutory liquidity ratio (SLR) from 24 percent to 23 percent with effect from Aug 11.
"In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth," the RBI said in its mid-term policy review.
However, the unexpected cut in the SLR is designed to ease the flow of credit to industry. The central bank has increased the lendable resources of banks by Rs.62,217 crore, which will remove all upward pressure on lending rates.
Announcing the policy, RBI governor D Subbarao said lowering interest rates now would aggravate inflation and not necessarily stimulate growth. At the same time, lowering of the SLR is a growth-oriented measure.
Bankers say though the measure will ease pressures on liquidity, it remains to be seen at what rates credit and liquidity pick up on the SLR cut.
"We have to see at what rate credit picks up, at what rate liquidity picks up from the SLR cut, which is an orientation towards growth," said Chanda Kochhar, MD, ICICI Bank, India's biggest private lender.
The freeing of lendable resources will bring down the prices of government bonds and thus also affect bank profits.
The SLR cut will be beneficial to private and foreign banks that retain the statutory 24 percent investment in government securities.
Compliance with SLR targets compels banks to invest in government securities, rather than allowing demand and prices of such securities to be determined by the market.
As a solvency measure, SLR in India continues to be higher than in other emerging economies from the perspective of the growth of the banking system.
On the other hand, public sector bankers point out to the adverse implications of SLR cuts for managing a large fiscal deficit. Banks being large subscribers of government bonds help manage the government's borrowings programme.
RBI, in its mid-term review, has cautioned that the current account deficit and fiscal deficit pose a threat to macro-economic stability.
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