When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
Detailed Explanation:
Statutory Liquidity Ratio (SLR) is the minimum percentage of Net Demand and Time Liabilities (NDTL) that commercial banks must maintain in liquid assets (cash, gold, government securities).
✅ Statement 3 – Correct: Reducing SLR by 50 basis points frees up funds previously locked in government securities, increasing loanable funds with banks, enabling them to cut lending rates to stimulate borrowing.
❌ Statement 1 – Incorrect: SLR reduction is a monetary policy tool with moderate impact; GDP growth depends on multiple factors, not just one policy change causing 'drastic' increase.
❌ Statement 2 – Incorrect: Foreign Institutional Investors (FIIs) respond to interest rate differentials, equity market returns, and global conditions, not domestic SLR adjustments.
❌ Statement 4 – Incorrect: SLR reduction increases liquidity in the banking system by releasing funds for lending, not reducing it.
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