Statutory liquidity ratio, the proportion of bank deposits set aside in safe government bonds, 'must' be brought down for an efficient market despite the buffering role it played in the economy during the global financial crisis, said the Reserve Bank of India governor without providing a timeline for the cut.
"The SLR certainly must be brought down although you must remember that it has protected us in the crisis because banks had liquidity," said RBI governor D Subbarao on the sidelines of an Indian Institute of Foreign Trade symposium on Tuesday.
He did not mention by how much the central bank planned to reduce the ratio. The governor has been maintaining that the SLR ratio has been quite high in India and there was a need to bring it down.
SLR is a mandatory requirement for banks to set aside a fixed percentage of deposits for investing in government securities. It limits the amount of deposits available to banks for lending to companies and individuals. The mandated liquidity ratio is 24%, brought down by 1 percentage point last December to ease liquidity pressure.
"I don't think RBI is looking at this as an immediate objective," said Indranil Pan, chief economist at Kotak Mahindra Bank. "The governor was probably pointing out that the SLR-CRR combine was brought down in the reforms process and needs to come down further, but this is clearly a long-term perspective for developing financial markets," he added.
Although high SLR helped the Indian banking system overcome the 2008 credit crisis better than the Western financial system, economists term it as 'financial repression' as it helps the government borrow at lower rates than what market forces would have forced it to pay in its absence.
Reducing SLR may make government borrowing more expensive and corporate borrowing cheaper as more funds would be available with banks to lend them, at least in theory. "We should bring it down so that there is credit available and the private sector does not get crowded out," said the governor.
New banking regulations are not likely to alter the country's reserve requirements. "Basel III has a provision that mimics SLR, so it's not as though it will be thrown away," said Subbarao.
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