The Reserve Bank of India on Wednesday committed to opening one more window to ease liquidity by announcing to cut statutory liquidity ratio (SLR) over next six quarters from January and bring it down to 18% from the current 19.5%.
The RBI said it would reduce SLR by 25 basis points every quarter starting next month till it reached 18%.
SLR is an amount that banks are required to maintain in the form of cash, gold reserves, the government approved securities before providing credit to the customers.
This amounts to the money remaining blocked for statutory reasons and not being available for investment in other avenues.
Once the RBI cuts SLR, it releases more money in the hands of the commercial banks to carry out their lending activities.
Easing of SLR requirements along with increased open market operations (OMOs) by the RBI is expected to liberate more money to take meet credit demand, especially by the small and medium sectors.
The government has been repeatedly asking the RBI to release liquidity and ease out credit squeeze to help MSMEs gasping for breath.
Lowering of SLR requirements are also expected to help reduce inflation and give a leg-up to economic growth.