What is SLR (Statutory Liquidity Ratio)?
SLR (Statutory Liquidity Ratio) is ratio of total bank deposits or a portion of the banks’ NDTL (Net Demand and Time Liabilities), that the banks are required to invest in assets specified by the Central Bank of the country (in India, RBI is the central bank). In other words, we can say under SLR, the banks are required to invest a certain percentage of the total bank deposits in gold, and government bonds and securities. RBI (Reserve Bank of India) uses SLR as an instrument to strengthen banks to meet any unexpected demand from depositors at short notice by selling the bonds.
How does SLR regulate money supply?
If Reserve Bank of India fixes SLR level at 22.5%, which means the banks invest Rs.22.50 in certain specified securities (predominantly central government and state government securities) for every Rs.100 of their deposits and consequently, the banks can use only Rs.77.50 for their economic or commercial activities like lending money to corporate or borrowers. A cut in SLR indicates that RBI is confident in the government’s commitment to fiscal consolidation. Since in SLR, the amount is invested in assets, the banks earn some amount of interest on that investment.