The 50-basis point reduction in the Statutory Liquidity Ratio (SLR) to 22 per cent was meant to provide more flexibility to the balance sheets of banks and may not result in cheaper loans, said RBI Governor Raghuram Rajan.
“SLR cut was not meant to make loans cheaper but to give more flexibility to banks on their balance sheets going forward as credit growth picks up,” Rajan said in a post policy conference.
SLR is the portion of deposits that banks have to compulsorily invest in government bonds.
Rajan explained that the idea behind the SLR cut was to release more funds to companies from banks.
“If government finances are improving and the Government is on a fiscal consolidation mode, we can afford to liberate access to government financing and make it possible for the public and private sector firms to get access to that financing,” he said, adding that banks may not need it now but as credit picks up and the economy gets stronger, banks will be able to use the funds to lend to the productive sectors of the economy.
Rajan said, “The best time to do these cuts is when credit demand is not so strong that the cut suddenly converts into substantial demand for credit and shift from government bonds.”
At present, banks have surplus SLR and this cut is part of long term planning by the central bank.
Liquidity management As call rates are trading in a wide range of 7-9 per cent, Rajan said the RBI is trying to keep it closer to 8 per cent (repo rate).
“Some of those oscillations are due to substantial and unanticipated variations in government balances. It creates certain amount of volatility. We are looking at the possibility of doing more frequent term repos of shorter maturities… to reduce volatility,” Rajan said.
The RBI is undertaking an analysis and may shortly come out with changes to smoothen the liquidity-management process.
RBI Deputy Governor Urjit Patel said the call money rate volatility in July was due to special circumstances, both in terms of volume and government balances.
“In July, the average call volume came down by 40 per cent. So, it was a thin market and in a thinner market, volatility is amplified. The average volume has come down from ₹16,000 crore to ₹10,000 crore. Secondly, given the late Budget and fiscal deficit target laid out by the Government, the turnaround in government balances were of the order of ₹90,000 crore,” Patel explained.
He further added that the call money market is highly skewed in favour of four to five banks which are perpetual users of call money. On Tuesday, the call market closed at 7.25 per cent as against Monday’s close of 7 per cent.