In an attempt to provide more liquidity to the banking system, the Reserve Bank of India (RBI), on Tuesday, reduced the Statutory Liquidity Ratio (SLR) by 50 basis points to 21.50 per cent from 22 per cent with effect from February 7.
This is likely to pump in around Rs.45,000 crore to the system, which is likely to prod banks to cut their lending rates.
The benchmark BSE Sensex on Tuesday reacted and it slipped by 122 points to close at 29,000.14.
However, the RBI kept the short-term policy rate (repo rate) unchanged at 7.75 per cent, which the central bank had reduced by 25 basis points from 8 per cent on January 15. It also maintained status quo in the Cash Reserve Ratio (CRR) at 4 per cent.
The SLR is the portion of deposits banks are required to hold in the form of gold or government securities before providing credit to customers.
The repo rate is the rate at which the central bank lends money to banks. CRR is the portion of total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.
“Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest stance,” said RBI Governor Raghuram Rajan in a statement while announcing the sixth bi-monthly monetary policy, here.
“In order to create space for banks to expand credit, the SLR is being reduced from 22 per cent to 21.5 per cent. Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth,” Dr. Rajan added.
Since RBI cut the repo rate, many banks have been relatively quick to cut their deposit rates, but not so quick to cut the lending rates. The SLR cut by the RBI is likely to give more elbow room for banks to cut rates. “It (rate cut by banks) is not by the intervention of the regulator but the competition and the management decision…will determine the reduction of rate,” said Dr. Rajan
The RBI Governor also said, “the RBI is not the owner or involved in the day-to-day running of the bank. That is a decision that owners and management have to take.”
Dr. Rajan added: “We cannot nudge them. We can only comment on the fact that despite a significant fall in long term interest rates, treasury rates have come down significant amount, over the last year and a half, and corporate bond rates have come down substantially, that bank lending rates have remained more or less flat over this period.”