What Will the Reduction in SLR Mean for the Economy?

Thu, 8 Jun Pre-Open

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As expected, the Reserve Bank of India (RBI) kept the repo rate unchanged in its monetary policy yesterday. It, however, reduced the statutory liquidity ratio (SLR) by 50 basis points to 20%.

What will be the repercussion of the same?

SLR represents the minimum percentage of deposits that commercial banks need to maintain at the end of every business day. This minimum amount is maintained in the form of government bonds, gold, etc. by banks before providing credit to suppliers.

Say, for example, if you deposit Rs 100 in a bank, and assuming the SLR to be 20%, the bank can use Rs 80 (Rs 100 - Rs 20) for giving loans to customers.

So, a fall in SLR rate basically means more money available with banks. This will further mean more loan money offered by banks to its customers. Finally, more money in the market will increase liquidity and also the spending power in the system.

A cut in SLR can ease up credit flow to private sector, so that it can make the most of growth measures likely to be taken by the government.

The reduction in SLR rate will also free up more resources for the banks to lend and increase their lending horizons. How effectively they lend or invest the same remains to the anyone's guess.

Lastly, the SLR cut will fill up any liquidity crunch led by notebandi move.

Nonetheless, reduction in SLR alone will not speed up the economic growth. To set the paralyzed growth into motion, way more action needs to be taken.

Regarding the impact of RBI policy on stock markets, rate hikes and cuts never really disappoint or enthuse us. For in no way do they impact our long-term views on stocks.

Even Vivek Kaul, our macro expert, feels that monetary policy is overrated.

Thus, it makes no sense in investing in finance or banking companies - the perceived beneficiaries of a rate change - just based on the decision of the RBI.

Investing based on such triggers amounts to pure speculation and in no way takes into account the inherent moats and weaknesses of the company.

Rather, one needs to follow a bottom up approach and look at the fundamentals of the company. This will help create long term wealth, irrespective of changes in the monetary policy.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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