When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
Answer & explanation
Answer: (c) Scheduled Commercial Banks may cut their lending rates
SLR is the share of deposits that banks must keep in liquid assets such as cash, gold and government securities. If RBI lowers it, banks can lend a larger part of their deposits. This eases their funds position, so they may cut lending rates. When RBI cut the SLR by 50 bps in August 2014, the Finance Ministry said the cut gave banks greater leeway to lend.
- ✗ (a) A 0.5 percentage point SLR cut only gives banks room to lend more. Any rise in growth is gradual and depends on credit demand, so 'drastically' is wrong.
- ✗ (b) SLR governs how banks hold their assets. It is not a direct driver of foreign portfolio inflows, which depend on returns, risk and exchange rates.
- ✓ (c) Banks have to hold less in government securities and other liquid assets, so more of their deposits are free for loans. This more comfortable funds position lets them reduce lending rates. The Finance Ministry said the cut gave banks greater leeway to lend.
- ✗ (d) This is the reverse of what happens. A lower SLR releases funds, so the liquidity available to banks rises. A higher SLR would reduce it.
Remember · Lower SLR (or CRR) means more lendable funds with banks and easier credit. Higher SLR means less lendable funds and tighter credit. A 50 bps change is modest, not 'drastic'.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- PIB, Ministry of Finance: Reducing SLR by 50 basis points gives banks greater leeway to lend (5 Aug 2014) ↗ “RBI has, however, reduced the SLR by 50 basis points giving banks greater leeway to lend, the Ministry adds.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR.”
Question: UPSC Civil Services (Preliminary) 2015, General Studies Paper I. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·
