When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
Explanation
Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold, or other securities.
1. Mechanism of SLR Reduction: When the RBI reduces the SLR, banks are required to keep a smaller portion of their deposits in liquid assets. This frees up more funds for the banks to use for lending purposes. 2. Impact on Lending Rates: As the supply of loanable funds with the banks increases, they are likely to reduce their lending rates to encourage borrowing and stay competitive. This makes Option C the most likely outcome. 3. Why other options are incorrect: * Option A: While a reduction in SLR can stimulate economic activity, it is unlikely to cause a 'drastic' increase in the GDP growth rate on its own. * Option B: Foreign Institutional Investors (FIIs) are influenced by global market conditions, interest rate differentials, and ease of doing business, rather than domestic SLR changes. * Option D: Reducing the SLR increases the liquidity available to the banking system for lending; it does not reduce it.