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SL R - Statutory liquirdity ratio reduced from 24 to 23% by RBI--a report--for essay writing and general awareness


D Subbarao
The good news is that the governor has increased the lendable resources of banks by Rs 62,217 crore, which will remove all upward pressure on lending rates.
MUMBAI: The bad news is D Subbarao, the Reserve Bank of India governor, has not cut the repo rate or the cash reserve ratio which are seen as a signal for interest rates. But the good news is that the governor has increased the lendable resources of banks by Rs 62,217 crore, which will remove all upward pressure on lending rates.

The cut announced by Subbarao was an unexpected one. The minimum prescribed investment in government securities has been lowered by one percentage point which means that Rs 62,217 crore currently invested in bonds, which yield around 8.5%, can be deployed in loans which generate double digit returns.

Bankers say that while the cut will not immediately prompt them to reduce interest rates, it will encourage them to lend more as it reduces pressure on liquidity.

For investors in a bank, this is a mixed blessing. On one hand it frees money to lend which will improve net interest income. But at the same time it reduces the demand for government bonds bringing down their prices. This will result in the prices of government bonds falling and will hit bank profits to that extent.

The cut will benefit private and foreign banks that have a very high credit deposit ratio and maintain the statutory 24% investment in government securities. Most public sector banks already hold surplus government securities.

Announcing its mid-term policy review, RBI governor D Subbarao left the repo rate - the rate at which it lends overnight funds to banks unchanged. It also did not reduce the cash reserve ratio - the portion of deposits that banks are required to maintain with RBI. However, it has reduced statutory liquidity ratio from 24% to 23% with effect from August 11.

Announcing the policy, Subbarao said lowering interest rates now will aggravate inflation and not necessarily stimulate growth. Given that macroeconomic conditions have worsened since April, the central bank has decided to retain focus on controlling inflation which could rise further. At the same time, it has said that it will ensure that there are enough funds available for lending.

RBI has put the onus on the government by stating that the current account deficit and fiscal deficit pose a threat to macroecnomic stability. There are indications that RBI may act if the government moves to contain the fiscal deficit by cutting food and fuel subsidies.

SL R - Statutory liquirdity ratio reduced from 24 to 23% by RBI--a report--for essay writing and general awareness Reviewed by sambasivan srinivasan on 4:41:00 PM Rating: 5

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