Consider the following statements about Statutory liquidity Ratio SLR 1 SLR is a qual...........

Economic Affairs Money Supply and Monetary Policy

Consider the following statements about Statutory liquidity Ratio (SLR):

1. SLR is a qualitative monetary policy tool.

2. Higher SLR tends to increase commercial banks investment in government securities.

3. SLR is more effective monetary policy instrument than Cash Reserve Ratio (CRR) as it is significantly higher than the CRR.

Which of the statements given above is /are correct?

1 only

2 and 3 only

1 and 3 only

2 only

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Explanation:

Although SLR is higher than CRR, CRR is more effective instrument. This is because of CRR the RBI does not give any return. Hence if CRR is reduced the banks get immediate liquidity which can be used to give loans and increase money supply. If SLR is reduced the bank may not immediately give that amount as loans as they were holding government securities to maintain SLR which give them returns even if lower than on commercial loans.