When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
A
India's GDP growth rate increases drastically
B
Foreign Institutional Investors may bring more capital into our country
C
Scheduled Commercial Banks may cut their lending rates
Correct Answer
D
It may drastically reduce the liquidity to the banking system
Explanation
Reducing the Statutory Liquidity Ratio (SLR) increases the pool of loanable funds available to banks, which allows them to lower interest rates to attract more borrowers. While this move is intended to stimulate the economy, option (a) is incorrect because a 50 basis point cut is unlikely to cause a "drastic" increase in GDP, as growth depends on various structural factors beyond just monetary policy. The core concept tested is the transmission of monetary policy through reserve requirements to influence credit availability and market interest rates.
Monetary PolicyQuantitative Tools of RBIReserve Bank of India (RBI)Statutory Liquidity Ratio (SLR)reduces50 basis pointsScheduled Commercial Bankslending ratesliquidity