SLR cut part of RBI's attempts to do away with statutory pre-emptions

By Gayatri

MUMBAI: The Reserve Bank of India move to reduce the statutory liquidity ratio or SLR - the mandatory investments by banks in government bonds is a part of its long-terms plan to do away such statutory pre-emptions, a top RBI official said.

The Reserve bank lowered the SLR from 22.5% of deposits to 22% on Tuesday during its third bimonthly monetary policy for FY’15. “The broader longer-term programme, I mean a five year programme, is that we should reduce the amount of pre-emptions we have in the system, including SLR and make an effective priority sector lending process.” RBI governor Raghuram Rajan said in a post policy teleconference with researchers and analysts, reacting to a question regarding the timing of the SLR cut when credit growth is already muted and the banking system is holding excess government bonds.

Going forward, the Reserve Bank will investigate conditions in the bond market and make appropriate decisions at that time. “These are necessary changes in the system and should not be seen as tied to the monetary cycle.” Rajan said

The Reserve Bank has been making a case for lowering the SLR over a period of time. The idea behind making banks invest in government bonds is to help the government fund its developmental expenditure. For banks these are a zero-risk investment avenue as it has sovereign protection. However, this could also be done by facilitating priority sector lending by banks, which is how the current thinking goes. The Reserve Bank already has a committee looking at how priority sector lending can be made more effective.