The Reserve Bank of India (RBI) is not in favour of cutting statutory liquidity ratio (SLR) of commercial banks in the immediate future. The central bank considers the SLR as a safety net for banks in the current uncertain period — especially with banks in the developed nations undergoing bailouts, nationalisation and takeovers.

“We will not be depending on SLR. It is a prudential tool and has served us well. And when banks all over the world are being assaulted, our banks are stable and strong as we have a requirement of 25 per cent of SLR which means banks have access to risk free gilts. So I don’t think this is the time to change the SLR,” RBI Governor D Subbarao told The Indian Express.

SLR is the portion of deposits that banks will have to compulsorily invest in government securities. As of now, SLR investment in G-secs is fixed at 25 per cent of banks’ net demand and time liabilities (NDTL) — deposits. The ratio was last revised in November 1997. Said Subbarao, “In the long-term, a lower SLR is a desirable objective and this is something we will work towards. But in the short-term it is the requirement of SLR which is important for the safety of financial sector, especially banks.”

According to the RBI Governor, SLR serves a dual purpose. “If there is a liquidity problem we can use it. But if it is only liquidity to be managed then we have a number of other tools the LAF, the repo, the reverse repo and the open market operations.”

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