A day after RBI lowered the mandatory government bond holding requirements for banks, i.e. Statutory Liquidity Ratio (SLR), its governor unveiled that the central bank was planning to reduce the amount of pre-emptions over a longer horizon to ensure more efficiency in the financial system and also for effective priority sector lending (PSL) process.
This development came after various stakeholders in the system, including the banks, expressed reservations about the pre-emptions like the SLR and CRR. Banks now have to set aside 22% as SLR, which is nothing but investing money in government securities and have to earmark 4% as Cash Reserve Ratio (CRR) without any interest payment. Meanwhile, banks have to set aside 40% of their lending for weaker sections of the society under the PSL.
Meanwhile, for SLR cut made during third bi-monthly monetary policy review, RBI’s chief underscored that this cut would not make any real impact in the immediate future and added that banks will continue carrying excess SLR for the 'foreseeable future'. RBI, while maintaining its status quo stance in key policy repo rate, slashed SLR by 50 basis points, releasing an additional Rs 40,000 crore into the system.
On limit for foreign institutional investors' investments in government securities, Rajan highlighted that RBI was happy with their renewed interest and also acknowledged their preference for longer maturity debt of over three years. Besides, he also stressed that central bank was not averse to the idea of such a relaxation.
