labels: economy - general, government policies, banks & institutions
President assents to SLR ordinance news
24 January 2007

New Delhi: A P J Abdul Kalam has assented to the ordinance providing more flexibility to the Reserve Bank of India, in fixing statutory norms for banks to invest money in government bonds, ahead of the RBI quarterly monetary policy review, due on 31 January.

The statutory liquidity ratio, currently fixed at 25 per cent, requires that banks have to keep 25 per cent of their deposits in liquid assets like cash and gold but mainly government bonds.

With the presidential assent to the ordinance approved earlier this month by the cabinet, the RBI can now cut the SLR below 25 per cent, which had been the minimum limit, and thus amends the Banking Regulation Act, 1949.

Since the Left parties that support the UPA alliance have opposed the larger amendment bill because it lifts the 10-per cent cap on voting rights of foreign banks in private sector banks, the government opted to bring the ordinance.

Bankers have favoured a cut in the SLR, as it releases funds for the banking system, which is facing a shortage of liquidity ever since the RBI increased the cash reserve ratio by 0.5 per cent, taking away Rs13,500 crore from the system.

Every per cent cut in SLR release around Rs25,000 crore in the system. With inflation touching a two-year high of 6.12 per cent, it would be tough for RBI to cut the SLR unless it adopts other anti-inflationary measures.

On Tuesday the government had announce a cut customs duty, expected to curb the government's tariff collections by Rs3,000 crore, on 11 product categories such as cement and infrastructure-sector imports, to curb rising prices.

Fighting inflation is a priority for RBI since it has projected inflation to remain between 5 to 5.5 per cent this fiscal. Finance minister P Chidambaram had said that the government in consultation with RBI and the ministry of agriculture and consumer affairs would curb inflation at all costs.

also see : Customs duty cut may impact government revenues by Rs3,000 crore

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President assents to SLR ordinance