[Economy] Statutory Liquidity Ratio (SLR): Meaning and implications

What is SLR?
What happens if SLR is decreased?
But why would SBI sell G-sec?
SBI takes initiative
Why is it called "Statutory" Liquidity Ratio?
How does SLR reduction impact Bond Yield?
SLR decrease unusual

To put this without getting "technically correct"

What the hell is SLR?

SLR Means Self Loading Rifle. The INSAS Rifle used by our Jawans, is one example of SLR. But for our purpose, SLR means-

Statutory Liquidity Ratio.
It is a tool used by RBI to control inflation and to boost growth. Anyways since last one year, RBI's primary aim is to control inflation.
If RBI sets SLR to 25%, that a Bank must keep 25% of its Total deposits, into non-cash forms prescribed by RBI: that is….

In Gold
In Corporate Bonds / Shares approved by RBI
G-Sec (Government Securities/ Treasury Bonds)

But most bank prefer to put all the money in Government securities (G-Sec), because they're more safe and convinient than the other two.

What happens if SLR is decreased?

Earlier SLR was 24%, but on last day of July, RBI changed it to 23%.
That means, if earlier SBI had total Rs.100 Deposited in all its 11,000+ branches, then SBI would have to park Rs.24 in G-sec but with new RBI rule, SBI will have to park only Rs.23.
Meaning SBI can take away Rs.1 from its G-sec investment and use it for giving as loan to regular customers. So, SBI will sell G-sec worth Rs.1 from its suitcase and use that 1 Rupee for lending as House, Car, Business loans to the customers.
SBI has one more rupee to lend to the customers, it'll reduce the interest rate (to seduce more customers). Thus Interest Rates go down when SLR is decreased.
In real life, 1% decrease in SLR, means SBI alone will have additional Rs.10,000 crores for lending
And all the banks (SBI, ICICI, Bank of Baroda etc combined), will have more than 68,000 crores for lending.
Now the reverse: If SLR is increased, then banks have less money to lend = they'll charge more interest rates on loans to keep the profit margin same.

But why would SBI sell G-sec?

Earlier I said, Banks prefer to park the SLR money into G-Sec, because it is safe and convenient. But when something is “safe” the rate of return (profit) is not high.
In case of G-sec, the rate of return on G-sec is 7.5%, while if SBI lends the same money to customers- it can earn more than 10% (because car and home loans have more than 10% interest rate, usually.)

SBI takes initiative

Just because RBI decreased SLR, doesn't mean all banks will immediately reduce the loan interest rates (Thank god they don't behave like Oil Companies- who have formed up sort of cartel, and then rarely reduce oil prices even if crude oil price decreases in global market.)
Anyways, whenever RBI decreases rates, usually SBI takes the initiative and decreases interest rates to attract new customers. [Because SBI is a big player with deep pockets, it can suffer temporary losses to get new customers- just like Wallmart etc. do by offering huge discounts].
Other banks such as ICICI, will then have to reluctantly follow the suit, to keep up with the competition of SBI.
For example, on 1st august 2012,
SBI reduced its Car loan interest rate from 11.25 to 10.75% and
Home loan interest rate from 10.50% to 10.25%.
So now if ICICI wants to keep in business, it'll have to reduce its rates. [can't just rely on Bacchan's advertisement power.]

Why is it called "Statutory" Liquidity Ratio?

It is called Statutory because it is provided by the Law/Statute(The Reserve Bank of India Act).
This Act says SLR cannot be more than 40% and less than 25%. [hahaha, if SLR was 40% then who would open a bank in the first place?!]
But in 2007, Government amended the act and removed the lower limit of 25%, so thus RBI went to 24 and 23% SLR.

How does SLR reduction impact Bond Yield?

You already know what is Bond yield. If not, then go through the Eurozone Article. (Click Me)
The Newpapers are reporting that Bond Yields increased after RBI cut down the SLR. So why or how did that happen? Think about it!

SLR decrease unusual

Usually, RBI would try to manipulate the money supply in the market (and thus control inflation) by changing the repo rate, and SLR is kept unchanged, but this time, RBI kept the Repo rate unchanged and instead decreased SLR, why? Again, Think about it.

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VIshal

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Excellent post Mrunal.Also,please write about the Syrian crisis summary.

Raavi

D. Subbarao is a genius. Not changing anything other than SLR, he has sent a clear message to government to curb overspending. Mostly subsidies for vote-bank politics. While also pushing banks to provide loans to private parties which could actually help our sluggish growth. I can only imagine the tremendous political pressure and still doing the right thing(so far so good).

Subsidies are not a sustainable solution to inflation. Inflation and growth go hand in hand.

abhinav dwivedi

excellent

shivam

No one explains so well as mrunal does.
Fan for life :)

Rakesh

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same here..:)

sanjeev agrawal

Cud u pl help in a few case studies of a few countries or of India in terms of diff parameters like Current account, inflation, unemployment, foreign exch reserves, import, GDP,Govt deficit>>>>what action to be taken etc etc. u may respond on my email also.
i require it urgently.

DK Gupta

Thank you sir…..You have made the things so easy that any one can easily understand….

sur sab

RBI kept the Repo rate unchanged and instead decreased SLR, why??
please explain..

sonika rawal

There are 7 components of monetary policy and we had been focusing on only 3 namely crr, repo rate and reverse repo rate ignoring the rest of 4.
its a gud that finally we hav started understanding the importance of other components and hav brought changes in SLR which will definitely bring fruitful results.

Harish

RBI is bankers bank. it lends to all the banks who in turn lend to people. but where does the money lent by RBI to banks come from? It can’t print fresh notes every time it wants to lend. Like banks lend to customers the money that was deposited by other customers—RBI lends money to banks from the deposits they have of all other banks which in this case is CRR. Like Repo and Rev Repo, which are revised every 4 months , CRR can’t be revised so frequently as it is not designed for controlling ‘growth’ and ‘inflation’ , but you may argue that change in CRR is leading to change in volatility , thanks to current downturn that central bank is resorting to change in the blunt tools of CRR and SLR not compromising its lending rate otherwise no central bank will use CRR and SLR to tame inflation and boost growth. (views are personal)

PARTHO

Reducing SLR = More money in the hands of people = INFLATION!!!, Why did RBI do such a thing?? Beats me. Anyone please explain, am i missing something here???

sam

If i m nt wrong, SLR Decrements ejects credit in our economy Instantaneously, plz correct me if wrong.

Ashis

Decreasing SLR is an anti-inflation move or pro-inflation move ?
SLR Decreased mans more liquidity in market ….more money…so more demand …but supply is limited ….results in inflation ….

plzz .. clarify this move and correct me if i m wrong ….thanks :)

manoj

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as per my understanding
SLR is not a liquidity management tool but a measure for risk mitigation it basically tells u this much amount of money is safe with banks ,normally in the form of g sec. u can tell its a trust builder for the society.
but under the current situation rbi expects a liquidity shortage for the productive sector of our country ,lending to productive sectors will not add any inflationary pressure on the financial system
the small and medium industries in our country, which have not been able to get credit from the banks,but big corporates are able to generate credit from alternate sources but the medium, small and micro industries are particularly squeezed.so rbi are trying to balance growth and inflation
one more thing-even if the money is getting invested in g secs its going to the same system but under controlled spending.
slr reduction- not much inflationary( i think)
mrunal
please correct me if i got anything(may be everything)wrong

arjun

Assume a market near by your locality ,since it is believed to be monsoon season now ,just imagine there is a demand for an umbrella .But the shopkeeper has only one umbrella and there is a demand by 100 people to buy that umbrella.
earlier in the summer ,umbrella was tagged with a price of 100rs
now, in monsoon due to demand -supply mismatch ,the shopkeeper quotes it for 300 rs , leading to inflation.
RBI reduction in 24% to 23%SLR , 1% money pumping into the market
let us assume 1000crore(selling up of G-sec in BOND MARKET) is getting deposited in SBI bank because of reduction in SLR . A person named -X , just see’s the kind of demand umbrella has in the market and goes to SBI applies for a loan ,since the lending rate by SBI has been reduced now . X gets a loan ,he opens a factory to manufacture the umbrella and supplies it to the market and gradually the prices of umbrellas falls ,thus controlling inflation .
This not only controls inflation but also it improves the growth of the economy and per-capita income .

Mrunal sir,

Bond -yield raise ,
SBI has bought the bond for 100rs and now it sells at 90rs (to another person or firm) leads to Bond-yield raise

but don’t you think sir ,it is loss for SBI and the SBI should increase its lending rate to contain the losses?

sonika rawal

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By selling the bond at RS.90 will surely bring looses to the SBI bt those will be temporary losses and being a big player in the market SBI can bear these looses in the short run.
And as far as the question of raising the lending rate is concerned, as per my thinking- dat will nullify the effect of reducing the SLR at the first place and the motive of increasing liquidity in the market wil also be restrained.

Eklavya

More money in the hands of people = INFLATION!

True. But sometimes, in order to reduce shortage of money supply in the market, it needs to be pumped up into the system. More money in the hands of people = more money to invest in projects, infrastructure, factories etc = more jobs creations and more demands for goods = more profit for companies = more salary to their employees = more spending by these employees = more profit to shop owners = an overall improvement in the economy.

Though simplistic, it often works like this.

KLN SRIKANTH

AS BANKS SELL G-SECS FOLLOWING SLR REDUCTION, BOND YIELDS RISE RESULTING IN GOVERNMENT RELUCTANCE TO ISSUE MORE BONDS(TACKLES INFLATION) .RBI THERE BY REMINDING GOVT OF ITS FISCAL RESPONSIBILITIES AND ENSURING MONEY SUPPLY TO PRIVATE ENTERPRISE(PROMOTES FROWTH).FEED BACK NEEDED

gary

Thanks Mrunal……

Thanks Mrunal……Keep updating???

Gary Touthang

pls keep up the gud job

soumya

thanks a ton mrunal, i am little bit weak in economics, you articles are helping me a lot

Vijay

The objectives of SLR are to restrict the expansion of bank credit:
1.To augment the investment of the banks in government securities.
2.To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India.

Now, Both CRR and SLR are instruments in the hands of RBI to regulate money supply(read, both liquidity and credit growth/off take) in the hands of banks that they can pump in economy. SLR restricts the bank’s leverage in pumping more money into the economy. On the other hand, CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the Central Bank to reduce liquidity in economy. Thus CRR controls liquidity in economy while SLR regulates credit growth in the country.

So, the bottom line:SLR is primarily used as credit regulating instrument, though more credit pumped in to the market may inherently lead to slight up-shoot in short-term inflation, but eases the restriction on growth and fuel the economy in the long-run

Manoj Yadav

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Dear Sir,

You’ve explained it very clearly, but i have some questions (please bear with me):
1) Lowering of CRR and SLR induces the bank for more lending, consequent effects of both the causes is lowering of interest rates and causes the people to borrow more as the cost of borrowing decreases.
2) Due to above the liquidity in the market increases, as liquidity is the sum total of the stock of money in circulation + holding of liquid assets like gold by the public.

As RBI earns/makes profit through Repo Rate, so dont u feel that RBI does not wants to compromise on its earning but wants to contribute to growth by Lowering SLR route? Please Comment Sir, this is very interesting question.

rahul

thanks murnal,i’m newcomer on your blog.nice job sir,keep it up.

Daljeet kaur

thanks sir………..

vijayalakshmi

Hello Mrunal Sir,

I want to know the india’s position in world corruption list and karnataka too.

i searched in net one show’s 187th position but one shows 7th position for india in world corruption list.

Thank you

Mrunal

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search the Transparency international’s website.
- mayur
  
  Reply to this comment
  
  wonderful sir…keep it up…!!!

Konali Gupta

you explain things than my post-grad in Economics mother. i love the site and this has fuelled my interest in the subject further. thank you tons

VIVEK KUMAR

EXCELLENT WOW….GOOD WORK SIR …REALLY TODAY MY CONCEPT IS CLEARED IN A DESI WAY
COMMENDABLE JOB

HATS OFF TO U GUYS

neeraj

awsome..

vivek bhai indian hai desi language jaldi samajh aati hai ……right na…

Bharath Kamaraj R

Absolutely super Mrunal! You are really a great teacher. Thanks a lot.

varun

its awesome sir… it will help too much in our all types of competitive exams….sir pls update notes related to the KYC , FOREX AND BASEL NORMS.. thanq.. vaery much sir..

ashu

thank u sir :)

RAJEEV

It may be two reason
1.it is high inflation time so by reducing repo public pressure to reduce lending rate feel by bank due to market regulated and demand of loan increased further.By reducing SLR bank will invest money in profitable areas like infrastructure,manufacturing etc it will enhance d economy growth of nation primarily and bank can reduce NPA.
2.ultimately it gives freedom to bank to invest money

Satish Ganni

Fantastic explanation. As a layman I was looking for good & simple article to understand SLR. This has certainly helped a lot. Thanks a lot.

MAYURI

DEAR SIR,
APKE JAISA GURU KISMAT SE MILTE HAI. I M FEELING VERY LUCKY TO UNDERSTAND THE CONCEPT OF SLR AND ITS IMPACT.AJ TAK BAHOT SE BOOK PADHE PAR SIRF S L R HI YAAD RAHA BAAKI SAB BHUL GAYE.AJ LAG RAHA HAI JAISE KUCH SAMAJH ME AAYA HO . Sir PLS REPO RATE , REVERSE REPO RATE, CASH RESERVE RATIO KA CONCEPT BHI SAMJHAYE.

with regards,
MAYURI

Muzamil Reshi

So useful. . . . Bless u

SAHIL

VERY NICE SIR,,

asha

hi mrunal sir….
As u said SBI is depositin Rs100 in all the branches is that money will
be kept unused n if not then then thr will increase n decrease in the financial movement of the bank
then how RBI knows the total deposit of a bank….

Satyendra

at present lower limit of slr is o% or anything else sir

excellent explanation
this is like u can put food to mouth …………
very easy language easy to understand
thanku sir

Manoj Yadav

The profit gained by RBI is via (1) Repo Rate route or (2) Marginal Standing Facility route. As, RBI does not want to curtail its profit/earnings by lowering Repo Rate but at the same time it wants to increase the money supply in the market to ensure growth thus it reduced SLR but left Repo Rate unchanged. Growth is always coupled with inflation, it is theoretically as well as practically impossible to separate both of them because: Increase in the GDP causes increase in the volume of transaction for goods and services which leads to increase in Transaction Demand For Money, hence inflation occurs. But if The increase supply of money is used for incurring expenditure on Investment goods then it surely will enhance the productive capacity of economy in the coming future which would enhance supply and lower down the prices in future.

As regards the Bond Yield: It depends upon the Economy’s capability of production and consequent generation of wealth. If people are confident about the proposition that” lowering of SLR would fuel the growth” then it is quite obvious for people to anticipate a higher return on investment.

priyanka

this the correct example of explaination given in”layman terms” thanks a lot :)

Reason for reducing SLR according to me,

1.High Inflation = High Repo rate by RBI = High interest rates By SBI etc. = no private companies borrowing money = Still government borrowing money from market = giving useless subsidies = more inflation = to counter this RBI reduces in SLR = selling of G-Sec by Banks = government pays = Less finances to govt = Govt cannot spend for unproductive subsidies = inflation down = additional money with bank because of low SLR = private sector borrows = good investment = growth prospect for economy

2.So to reduce SLR is to reduce money available from govt. and encourage Banks for good investment in economy

sivan

Hi sir,
i m really amazed with the way you explain things in a deeper sense. It is easy for anyone to read just like that but the key factor is understanding the concept. In that case u made tremendous effort and u did a fine job in doing so. I m so proud of u.Thanks a lot for these wonderful lectures on different topics.Thanks a million.

SHASHANK

salute to you sir….thanks for all the help..

samir

gazab…thanx

mahalakshmi

Thank you sir…you made it so easy that everybody can understand!

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[Economy] Statutory Liquidity Ratio (SLR): Meaning and implications

What the hell is SLR?

What happens if SLR is decreased?

But why would SBI sell G-sec?

SBI takes initiative

Why is it called "Statutory" Liquidity Ratio?

How does SLR reduction impact Bond Yield?

SLR decrease unusual

53 comments to [Economy] Statutory Liquidity Ratio (SLR): Meaning and implications

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[Economy] Statutory Liquidity Ratio (SLR): Meaning and implications

What the hell is SLR?

What happens if SLR is decreased?

But why would SBI sell G-sec?

SBI takes initiative

Why is it called "Statutory" Liquidity Ratio?

How does SLR reduction impact Bond Yield?

SLR decrease unusual

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