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Q75 (CDS-I/2010) Economy › Money, Banking & Inflation › Monetary policy tools Answer Verified

Consider the following statements with regard to Statutory Liquidity Ratio (SLR): 1. To meet SLR, commercial banks can use cash only. 2. SLR is maintained by the banks with themselves. 3. SLR restricts the banks' leverage in pumping more money into the economy. Which of the statements given above is/are correct ?

Result
Your answer: —  Â·  Correct: C
Explanation

Statutory Liquidity Ratio (SLR) is a monetary policy tool where scheduled commercial banks must maintain a specific percentage of their Net Demand and Time Liabilities (NDTL) in liquid assets. Statement 1 is incorrect because SLR can be maintained in the form of cash, gold, and government-approved securities, not just cash [c1, c2, c4]. Statement 2 is correct as SLR is maintained by the banks themselves, unlike the Cash Reserve Ratio (CRR) which is kept with the RBI [c1, c2]. Statement 3 is correct because SLR acts as a mechanism to control credit expansion; by requiring banks to lock away a portion of their deposits in safe assets, it restricts their leverage and capacity to pump excess money into the economy [t1, t2, t5]. This helps the RBI regulate liquidity and manage inflation [t4, t6].

Sources

  1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CASH RESERVE RATIO (CRR) vs STATUTORY LIQUIDITY RATIO (SLR) > p. 170
  3. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > INCREMENTAL CASH RESERVE RATIO > p. 168
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