The Reserve Bank of India (RBI) on Thursday said it might further reduce the statutory liquidity ratio (SLR) gradually. “As the liquidity coverage ratio (LCR) requirement increases progressively, RBI may consider it desirable to further reduce the pre-emption of banks’ resources through the stipulation of SLR in gradual steps, along with a commensurate decline in the held-to-maturity (HTM) dispensation,” said the regulator in its Financial Stability Report released on Thursday.
According to the regulator, given the road map for fiscal consolidation to reduce the fiscal deficit to three per cent of gross domestic product (GDP) by 2016-17, any decline in incremental availability of government securities may not impinge on SLR and LCR requirements.
Earlier this month, in its bi-monthly monetary policy review, RBI had reduced the SLR of banks by 50 basis points from 23 per cent to 22.5 per cent of their net demand and time liabilities (NDTL) with effect from the fortnight beginning June 14.
The head of treasury of a public sector bank believes the gradual decrease in SLR will result in more liquidity with banks. However, the move is not very positive for the bond market, as yields will rise due to banks selling illiquid securities. Even earlier this month, when the SLR was reduced, bond yields had initially climbed up by a few basis points on the same day. Later, a dovish stance by RBI in the monetary policy had helped yields to fall.
A quantitative impact study carried out by RBI found most of the banks satisfied the minimum criteria of LCR of 60 per cent even with the earlier SLR stipulation of 23 per cent. In the study, the excess holdings of the cash reserve ratio (CRR) and SLR and government securities holdings equivalent to one per cent of NDTL were considered banks’ high-quality liquid assets.
According to RBI, banks stay invested in SLR eligible securities, which are akin to HQLA, not only to comply with statutory obligations, but also due to other factors such as risk-free status, a high collateral value and their importance in accessing central bank liquidity window. “Hence, Indian banks have an adequate liquidity cushion to the extent that they are required to comply with SLR stipulations,” said RBI in the report.