Statutory Liquidity Ratio
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It is legally obligatory on the part of all commercial banks to invest a certain part of their deposits in govenment bonds. The ratio of the money invested in government bonds to the total deposits is called the statutory liquidity ratio. It serves two purposes
a)Â Â Â it provides the central bank an Instrument of monetary policy.
b)Â Â Â It provides a certain definite amount of money to the government for financing economic development. The parliament has fixed the range of the SLR between 25% and 40%.
The RBI is authorised to fix and change the SLR within this margin. When it wants to bring about a contraction of credit, it increases the SLR. The commercial banks have to invest a larger part of their deposits in government bonds. To that extent they are left with less cash for advancing loans that puts a brake on their capacity to extend credit.
Upto 1991, the SLR was 38.5% which was very near the ceiling. On the recommendations of N Narsimha committee, RBI started lowering the SLR. It was brought to 25% by 2005 and has been maintained at the same level since then. In 2005 parliament authorised RBI to lower it below 25%, but RBI did not use that authority. Now it is not possible that the SLR would be lowered till the inflationary trends are controlled.
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