Statutory liquidity ratio ( SLR) is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, cash or government approved securities like bonds and debentures issued by government, before providing credit to the customers. Statutory Liquidity Ratio is determined and maintained by Reserve Bank of India in order to control the expansion of bank credit and relative effect on money supply in economics and relative effect on inflation. (Wikipedia)
SLR is double edge sword. It provides a tool to banks for hedging against future insecurity of liquidity and at the same time it provide source of income to government for its expenditure. It also give benchmark for RFR (risk free rate of return ) for calculations of Corporate finance What is reality? Because of SLR, it is mandatory for banks and some financial institutions to buy Government bonds. It is good practice for government as it is a source of income. In Indian economy, very few peoples are eligible to pay Income tax. 24% income for govt is Debt. And 14% is income tax. Another sources of income for government are company tax(20%), income from disinvestment ( 4%) Custom duty ( 9%), ( ref from no. Given in Central budget 2015-16) So for developing the undeveloped, it is mandatory for government to borrow money from open market. So it made difficult for government to live peacefully as now there is interest ( villain) came into picture. As per budget estimate govt will spent 20% of its income toward repayment of interest and matured debt. Which is 2nd largest expense in budget after payment to states of their parts. In another word, govt is taking fresh loan for repayment of old one. There is another effect of it. As RBI is banker to government, it is supposed to borrow money and repay it for government. RBI is also printing money for whole economy and controlling the supply of money. Money supply is decided on many factors, not one. But because of interest on govt loan, this extra amount is also added in circulation and the new amount is high. As now there are no goods or services to balance this it is like junk money, causes reduction of value of currency which indirectly came in front of as INFLATION. There another aspect of the issue. As RBI is Investment banker of Government, it is supposed to make Government bonds attractive. For this, it maintain the interest rates high with its power. It affects the interest rates and growth as Debt from banks is one source in India for capital. THEN WHAT TO DO ? Nothing. As it not in your and my hand. But what is possible way for government, and RBI governor is doing same thing is, ABOLISH SLR WHY? WHAT WILL HAPPEN THEN? There will be no way for government to make mandatory but to collect taxes and Capital Gains and Divided from Public Sector undertakings. There will be more space for making investment for infrastructure, which are not possible right now. Want to finish this writing with a different thought Effect of compounding IF WE DECIDE TO PAY TAX TODAY. IT WILL REDUCE GOVERNMENT EXPENDITURE OF 8% INTEREST. SO GOVERNMENT WILL GIVE YOU DEDUCTION TOMORROW.
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