RBI Lowered SLR to 23 per cent

RBI lowered statutory liquidity ratio by 2% from 25% to 23%.

Dec 1, 2010 12:47 IST
facebook IconTwitter IconWhatsapp Icon

The Reserve Bank of India on 29 November 2010 lowered the statutory liquidity ratio (SLR) by 2 percentage points to 23% with an objective to ease the cash crunch in the financial system. The banks will therefore be able to maintain lower investment level in government bonds. RBI’s move came in the wake of banks tapping the RBI window to borrow around Rs 1 lakh crore daily in November. On 29 November itself, banks tapped RBI to raise around Rs 80,000 crore though the overnight rate in the inter-bank call money market rose to a high of 6.9%.

RBI soon after declared that it would conduct a second liquidity adjustment facility (LAF) auction till 28 January 2011. Under LAF, banks are able borrow from RBI or park surplus cash. In the past few months banks projected a trend of borrowing at the prevailing repo rate due to tight liquidity scenario.

RBI's SLR norms state that banks ought to keep 25% of their liabilities in government securities and have to pay penalty for falling below the prescribed level. RBI’s decision to lower SLR implies that banks will not be penalised for keeping 23% of their liabilities in SLR.

According to analysts RBI’s move to lower SLR is the result of tight liquidity situation as well as of expectation of further pressure in coming weeks as demand for loans tends to pick in December 2010. Also the several share sales lined up by the government will be stuck in case the pressure was not removed. The prevailing liquidity pressure had prevented the government from altering its borrowing programme.