Cuts in SLR will increase credit facility to productive sectors

High hopes from sixth bi-monthly monetary policy review, 2014-15 of Reserve Bank of India (RBI) got shattered today when it kept the key rates unchanged. The repo rate remains unchanged at 7.75%. Also the reverse repo rate stuck at 6.75%. However, a cut in SLR by 50 basis points was seen. The SLR reduced to 21.5%, effective from 7th February, 2015.   images 1

SLR means the reserve requirement that reserve requirement that the commercial banks in India require to maintain in the form of gold, cash or government approved securities before providing credit to the customers. The SLR is determined as a percentage of total demand and time liabilities. Where Time Liabilities refer to he liabilities which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon, and demand liabilities are such deposits of the customers which are payable on demand. An example of time liability is a six month fixed deposit which is not payable on demand but only after six months.

The SLR is commonly used to control inflation and fuel growth, by increasing or decreasing it respectively.

With the decrease in SLR, the scope for banks to expand the credit has increased. This scope shall be fully utilized by banks through extending their credit facility to productive sectors which in turn will support investment and growth.

During the last month, when the repo rate was lowered market expected the rate to further decrease. Fall in inflation rate and subsequently fall in oil prices to the lowest level formed the basis for decrease in repo rate.

Raghuram Rajan highlighted that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15. Thus, it is appropriate for the RBI to await and maintain the current interest rate stance.

 

The central bank’s ability to further cut the rate would partly depend on the government efforts to reduce India’s fiscal deficit. The government’s step towards this was noticed when the 10% stake in Coal India Ltd. was disinvested.

RBI estimated the current account deficit (CAD) for 2014- 15 at 1.3 per cent of the GDP, significantly lower than the earlier projection.  Thus, further rate cut may be expected.

The first bi-monthly monetary policy statement for fiscal year 2015-16 is scheduled on April 7, 2015.