Rajan hints at more SLR reductions as fiscal metrics improve

The Centre's fiscal consolidation resolve led to the cut in banks' mandatory SLR for the second time in a row, RBI Governor Raghuram Rajan said today, hinting at more such liquidity enhancing steps in tandem with the government's action on fiscal deficit.

"Steadily, we want to reduce this (Statutory Liquidity Ratio) consistently with the space that the government provides by rectifying its finances," Rajan said at the customary interaction with the media after announcing the third bi-monthly monetary policy here today.

Terming the SLR as an "old obligation" which puts constraints on banks' balance sheets, Rajan said it is important to reduce such mandated burdens to give banks a space to compete in a new economy.

For the second time in many months, RBI cut SLR by 50 basis points to 22%, a move that could infuse around Rs 40,000 crore into the financial system.

In the June policy too RBI had reduced SLR by a similar quantum. But most banks carry excess SLR to the tune of 27% as bond yields at over 8.5% are risk-free business for them.

The SLR cut comes in wake of government narrowing the fiscal deficit target to 4.1% of GDP for 2014-15 and affirming its resolve to narrow it further to 3% by the financial year 2016-17.

With analysts questioning the feasibility of achieving 4.1% fiscal deficit target, Rajan today avoided a direct reply but said he has no reasons to doubt the government commitment to fiscal consolidation.

"I think the government, both the past government and the current government, has stated again and again that they are on a fiscal consolidation path. I don't think I have any reason to doubt that," he said.

Rajan also conceded that the move is aimed at helping banks meet the liquidity coverage ratio norms as they gear up to meet the stringent higher Basel-III framework requirements.

"As we move to liquidity coverage ratios and those become issues for the banks, we want to give banks flexibility and also, to some extent, we have to reduce the kind of obligations that are put on the banks because they are entering a more competitive environment," he said.