Is reduction in SLR in favour of private sector?

Reserve Bank of India on 3 February 2015 reduced the Statutory Liquidity Ratio (SLR) by 50 basis points to 21.5 percent from 22 percent. The reduction of SLR would enable commercial banks to pump in additional liquidity to the tune of 4500 crore rupees into the money market free of cost.

The reduction in SLR is a welcome move as it will help unlock the low-yielding government securities and make it available to the money market to be put into more productive use.

Besides this, the reduction in SLR instead of Cash Reserve Ratio (CRR) will enable the banks to shift their portfolio in favour of the private sector against the government or to the more productive from the less productive sector.

With the reduction of SLR, the RBI is shrinking the market for government securities and simultaneously enlarging availability of credit to the private sector. With that, the cost of funds to the government will increase and the rate charged by banks to the private sector decreases.