UPSC Prelims 2015 · Question 22 of 98
UPSC Prelims 2015 question on SLR Reduction Effects
- ExamUPSC CSE
- Year2015
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicMoney Market
- DifficultyMedium
- TypeDirect
When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
Show answer
Answer: C. Scheduled Commercial Banks may cut their lending rates
Verdict
The answer is that Scheduled Commercial Banks may cut their lending rates. Reducing the Statutory Liquidity Ratio frees resources and gives banks room to lower rates.
Analysis
The SLR is the proportion of net demand and time liabilities a bank must hold in cash, gold or approved securities. Cutting it by 50 basis points releases funds that can be lent, which gives banks elbow room to reduce lending rates. The GDP option overstates the effect, since a single ratio change does not move growth drastically. The foreign investor option describes a channel that responds to interest differentials and sentiment, not directly to an SLR change. The fourth option reverses the direction, because lowering the SLR adds liquidity to the banking system rather than reducing it.
Source
The Hindu report on the Reserve Bank cutting the SLR to provide liquidity.
How to crack it
This is a current affairs term that needs a reasoning step, so run the mechanism and then rank the options by how directly they follow. A reserve requirement cut acts first on the balance sheet of the bank, then on lending rates, then on credit growth, and only distantly on GDP. Options containing drastically or comparable intensifiers are usually planted, because a single instrument rarely produces a dramatic effect.