SLR Cut by RBI to Free Up Funds Worth Rs 6,500 Crore for Economic Growth

SLR Cut by RBI to Free Up Funds Worth Rs 6,500 Crore for Economic Growth

In its third bi-monthly monetary policy for 2014-15, Reserve Bank of India (RBI) did not announce any cut in interest rates which is seen as part of a continuing disinflation process aimed at arresting the growth of consumer price index (CPI) inflation in the current and next financial year. In the review, RBI Governor Raghuram Rajan made it clear that repo rate would remain unchanged at 8%, reverse repo rate at 7% and Cash Reserve Ratio (CRR) at current 4%. The only important change introduced was a reduction in the Statutory Liquidity Ratio (SLR) by 50 basis points to 22 percent.

SLR refers to the amount of capital which is mandatory for banks to maintain in the form of gold or government securities. Experts suggest that reducing SLR from current 22.5 percent to 22 percent can release an additional Rs 6,500 crore for banks. This move is also being considered as a reform measure intended to help the economy achieve the larger goal of fiscal consolidation. With a goal of 4.1% of fiscal deficit in the current financial year, there was a need for additional funds to fuel growth-oriented sectors of economy. With the new cut in SLR, banks can provide that additional funding in the form of credit and help further economic growth.

The RBI also reduced the ceiling on debt which is mandated to be Held-To-Maturity by 0.5 percent to 24 percent. However, the current policy review by RBI is seen as cautious as compared to the last one and experts suggest that it is indicative of the fact that rate cuts may not be introduced in the FY15. RBI Governor Raghuram Rajan said that we are looking at a target of keeping the CPI inflation at or below 8 percent by January 2015 and at or below 6 percent by January 2016.

He also hinted that there can be room for rate cuts in future in case disinflationary targets are not met in an effective manner. It was also mentioned that while taking any steps to deal with inflationary pressures, upside risks must be kept in mind. He said that we must keep an eye on global economic recovery, changing geo-political conditions and developments along with the local monsoon conditions to deal with any element of uncertainty.

On the whole, he was optimistic that domestic economic conditions are showing signs of improvement and it would be possible to bring down inflation and achieve economic growth in near future.