SLR impact interest on rates

 SLR reduction is not so relevant in the present context for two reasons: One, as a part of the reforms process, the government has begun borrowing at market-related rates. Therefore, banks get better interest rates compared with the earlier days for their statutory investments in Government securities. Second, banks are still the main source of funds for the government. Which means despite a lower SLR requirement, banks’ investment in government securities will go up as government borrowing rises. As a result, bank investment in gilts continues to be higher than 30 per cent despite RBI bringing down the minimum SLR to 25 per cent a couple of years ago.

Therefore, for the purpose of determining the interest rates, it is not the SLR requirement that is important but the size of the government-borrowing programme. As government borrowing increases, interest rates, too, look up. Besides, gilts also provide another tool for RBI to manage interest rates. RBI conducts open market operations by offering to buy or sell gilts. If it feels interest rates are too high, it may bring them down by offering to buy securities at a lower yield than what is available in the market.