Civil Services Prep

Prelims 2015 · Economy · Question 22

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

  1. India's GDP growth rate increases drastically
  2. Foreign Institutional Investors may bring more capital into our country
  3. Scheduled Commercial Banks may cut their lending rates
  4. It may drastically reduce the liquidity to the banking system

Answer

Scheduled Commercial Banks may cut their lending rates

  • (a) SLR reduction can increase banks’ lendable funds, but GDP does not rise drastically merely due to a 50 bps cut. Incorrect.
  • (b) SLR is a domestic liquidity/regulatory tool; it does not directly induce Foreign Institutional Investors to bring in more capital. Incorrect.
  • (c) Lower SLR means banks need to keep less in liquid assets, freeing more funds for lending; this can lead Scheduled Commercial Banks to reduce lending rates. Correct.
  • (d) Reducing SLR generally increases lendable liquidity in the banking system, not reduces it drastically. Incorrect.
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