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Main Objectives for maintaining the SLR..


The main objectives for maintaining the SLR (Statutory Liquidity Ratio - mandated investments in government securities) ratio are the following:

   ** To control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of India (RBI) can increase or decrease bank credit expansion.

**   To ensure the solvency of commercial banks.
   
** To compel the commercial banks to invest in government securities like government bonds.

If any Indian bank fails to maintain the required level of SLR, then it becomes liable to pay penalty to RBI. The defaulter bank pays penal interest at the rate of 3 % per annum above the Bank Rate, on the shortfall amount for that particular day.


But, according to the Circular, released by the Department of Banking Operations and Development, RBI; if the defaulter bank continues to default on the next working day, then the rate of penal interest can be increased to 5 % per annum above the Bank Rate. This restriction is imposed by RBI on banks to make funds available to customers on demand as soon as possible.

Gold and government securities (or gilts) are included along with cash because they are highly liquid and safe assets.

The RBI can increase the SLR to contain inflation, suck liquidity in the market, to tighten the measure to safeguard the customers money. In a growing economy banks would like to invest in stock market, not in government securities or / gold as the latter would yield less returns. One more reason is long term government securities (or / any bond) are sensitive to interest rate changes.

But in an emerging economy interest rate change is a common activity.


From Wikipedia
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