Should the RBI reduce the statutory liquidity ratio by 50 basis points, then:

• Should the RBI reduce the statutory liquidity ratio by 50 basis points, then Scheduled commercial banks will cut their lending rates.
• SLR is a mechanism used by RBI to regulate the liquidity of assets and requires the banks to invest a certain portion of their deposits in RBI-approved securities or gold.
• When SLR is reduced, banks have more money to lend which may lead to a decrease in lending rates.
• By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.
• By reducing the level of SLR, the RBI can increase liquidity with the commercial banks, resulting in increased investment.
• This is done to fuel growth and demand.
• Hence, option C is correct.

Additional Information

• SLR is used to control the bank's leverage for credit expansion.
• The Central Bank controls the liquidity in the Banking system with CRR.
• In the case of SLR, the securities are kept with the banks themselves, which they need to maintain in the form of liquid assets.
• If SLR increases, it restricts the bank's lending capacity and helps in controlling inflation by soaking the liquidity from the market.
• Consequently, banks will have less money available to lend, and they will charge higher interest rates on loans to keep up with their profit margin.