When the Reserve Bank of India reduces the Statutory Liquidity by 50 basis points, which of the following is likely to happen?

The correct answer is C. SLR is the share of a bank's net demand and time liabilities that it must hold in liquid assets such as cash, gold and government securities, under Section 24 of the Banking Regulation Act, 1949. When RBI cuts SLR by 50 basis points, the mandatory holding falls and more deposits become lendable. Cheaper funds give banks room to reduce lending rates, though they are not forced to. Actual rate cuts also depend on credit demand.

Why the others are wrong:

• A: A 50 bp SLR change affects credit only gradually and cannot by itself cause a drastic jump in GDP growth.
• B: FII flows depend on global conditions, interest rate differentials, currency expectations and sentiment, not directly on a domestic SLR change.
• D: This is the reverse. Lower SLR releases funds, so liquidity rises. An SLR hike is what drains liquidity.

Concept link: SLR works both as a monetary policy tool and as a prudential requirement for bank safety. For Mains GS-3, it illustrates the trade-off between credit expansion and bank solvency. SLR has since been brought down to around 18 per cent in recent years.

Trap: candidates confuse SLR with CRR or assume that any policy easing draws in foreign investors, and so pick B or D.