RBI gets freedom to fix SLR

In what will give greater operational flexibility to the central bank in the conduct of the monetary policy, the Cabinet on thursday gave its approval to pormulgate an ordinance to amend the Banking Regulation Act 1949. This is expected to release more funds for the industry whose appetite for credit has strained the availability of loanable resources. The central bank will now have complete freedom in fixing the floor and ceiling levels of the statutory liquidity ratio (SLR). At present there is a 25% floor and a 40% ceiling stipulated in the act itself. What is SLR? Statutory Liquidity Ratio which is commanly called SLR is a mandate for banks that says they must keep a stipulated proportion of their total demand and time liabilities, meaning deposits, in the form of liquid assets like cash, gold and approved securities, mostly government securities. Investment in these securities amounts to mandated lending to the government, leaving that much less of the banks' deposits for lending to the commercial sector. At present this is 25%. Implication: Lowering the SLR means banks have more money to lend where they get better yield than SLR securities. Bond Market will weaken as Banks take less Government papers.