SLR cut is a planning for the future, says RBI governor Raghuram Rajan

KOLKATA: Reserve Bank of India has lowered statutory liquidity ratio ( SLR) by 50 basis points and told banks to prepare themselves for higher credit growth when the economy picks up.

Governor Raghuram Rajan said that the reduction in SLR might not spur credit growth immediately but it would enable banks to meet credit demand whenever necessary.

"SLR cut is more about planning rather than immediate effect," Rajan said at a post policy media briefing. He does not expect banks to lower rate immediately because of the SLR reduction.

RBI lowered SLR of scheduled commercial banks to 22% of net demand and time liabilities (NDTL) with effect from the fortnight beginning August 9, 2014. SLR is the amount that the commercial banks require to keep in the form of gold or government approved securities before providing credit to the customers. At present banks are required to keep aside 22.5% of their deposits in SLR.

Rajan said SLR cut would create room to lend more to productive sectors. He pointed out that improving government finance is creating expectation of an early demand pick up.

RBI also said it would continue to provide liquidity under overnight repos at 0.25% of bank-wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system.

RBI said that the regulatory pre-emption such as SLR has been reduced as banks are entering a more competitive environment.

There was however no change in short term policy rates at 8% as widely expected since the central bank is still worried about inflationary pressure, given the possibility of shortfall in monsoon.