Rethinking the Statutory Liquidity Ratio (SLR)

The piece opens with a commendation of the Reserve Bank of India's (RBI) governor, Sanjay Malhotra, for his bold and unconventional monetary policy decisions, specifically highlighting a substantial repo rate cut. It then suggests an even bolder move: abolishing the Statutory Liquidity Ratio (SLR).

Understanding the SLR

• The SLR mandates banks to hold a specific ratio of their assets, currently 18%, in the form of gold or government bonds.
• No modern economy maintains such a requirement, signifying its antiquated nature.

Arguments Against SLR

• Economic Growth: SLR is considered a hindrance to economic growth, forcing banks to invest in low-yield government securities instead of lending to businesses and innovators.
• Financing Government Debt: It compels banks to finance government debt, termed as 'lazy banking', and stifles credit flow to more productive sectors.
• Stability Argument: The argument that SLR provides financial stability is outdated given the robust regulatory framework under Basel III, which already ensures stability through LCR and NSFR.
• Fiscal Responsibility: SLR provides a captive market for government bonds, allowing fiscal irresponsibility as policymakers are shielded from market pressures.
• Monetary Control: Concerns over weakened monetary control without SLR are unfounded since RBI possesses modern tools for liquidity management.
• Risk Management: Continuation of SLR prevents banks from developing risk management strategies, keeping them in a state of 'regulatory babysitting'.

Conclusion: Modernizing India's Financial System

The abolition of SLR is advocated as a necessary step towards modernizing India's financial system, freeing up capital for innovation, employment, and industrial expansion. The text argues that India must move away from outdated economic controls to unleash its banking sector and accelerate economic growth.