…………….The reduction in SLR does not affect money supply. Will it not affect banks’ subscription to fresh issues of securities in a year when massive borrowing is planned? The answer is “no”. We have seen excess SLR investments in the past even when growth of non-food credit was good. It was because, both for maintaining prudential ratios and for avoiding the rising trend in non-performing assets, banks prefer investment in gilt-edged securities. A deputy governor of RBI once characterised this tendency as “lazy banking”. Second, with the massive limit of Ways and Means Advances from RBI to the government at Rs 50,000 crore and the possibility of conducting buybacks, the central bank can always ensure that the government’s needs are met. Since there is no release of impounded funds, there is no relaxation of the central bank’s basic stance of tightness. At the same time, from the point of view of public relations, reducing the SLR by two percentage points will give the impression of improving liquidity. It will be a win-win situation for RBI.
Continue reading...........- A Seshan, Economic consultant and a former officer-in-charge in the Department of Economic Analysis and Policy at the Reserve Bank of India
No comments:
Post a Comment