The SLR play

As widely anticipated, the Reserve Bank on Wednesday kept interest rate unchanged.  However, in an intended move to provide more liquidity to banks, it has slashed the Statutory Liquidity Ratio (SLR) by 0.5 per cent to 20 per cent starting June 24.

SLR is the percentage of deposits that bank must maintain to invest in safe-haven assets such as government securities.

India has a history of a higher SLR requirement, which stood around 38.5 per cent in 1990's. It was easy for bankers too to park their funds in SLR and earn risk-free returns. But with central bank's focus towards more liquidity, this ratio changed its course gradually and saw a continuous decline since 2009.  It declined gradually, 5 percentage points from 25 per cent to 20 per cent, during the period.

If one tracks the monthly trends of banks investments in government and other approved securities, it showcases a mixed picture.

Interestingly, investments in government and other approved securities grew 12.2 per cent in November 2016 followed by 11.5 per cent growth in December 2016. These two months registered a double-digit growth which was never achieved in any month over 17 years. This growth was however, short-lived as these investments declined in the following three months.  However, they seem to be on track over the last two months of 2017.