In its sixth bi-monthly monetary policy review RBI on February 3 reduced the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22 per cent to 21.5 per cent with effect from the fortnight beginning February 7.

While reducing the SLR requirement, RBI said, “In order to create space for banks to expand credit, the SLR is being reduced from 22.0 per cent of NDTL (net demand and time liabilities) to 21.5 per cent. Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth.”

However, the apex bank kept the repo rate unchanged at 7.75 percent. In an unscheduled announcement on January 15, RBI had cut the repo rate by 25 basis point from 8 percent to 7.75 per cent.

The next change is now expected after the government presents its annual budget at the end of this month.

Reasoning for keeping interest rates unchanged, RBI, in its policy statement, said, “Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance.”

Reduction in the statutory liquidity ratio (SLR) would mean more funds for banks to lend to its customers.

Speaking on the growth prospects, RBI added, "The outlook for growth has improved modestly on the back of disinflation, real income gains from decline in oil prices, easier financing conditions and some progress on stalled projects. These conditions should augur well for reinvigoration of private consumption demand, but the overall impact on growth could be partly offset by the weaker global growth outlook and short-run fiscal drag due to likely compression in plan expenditure in order to meet consolidation targets set for the year.”

What is the statutory liquidity ratio (SLR)

As mandated by the RBI every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Decrease in the SLR allows the banks to pump more money into the economy.