RBI may lower banks' reserve requirements, bring back inflation-linked bonds

The Reserve Bank of India (RBI) is likely to prescribe a lower statutory liquidity ratio (SLR) for banks in a bid to ease liquidity constraints, even as RBI governor said the central bank is looking at reintroducing the inflation indexed bonds for banks' SLR holdings.

Statutory liquidity ratio is the proportion of deposits that banks have to invest in government bonds.

SLR serves as a buffer in times of excess liquidity, especially in times like the global financial crisis but, for a more efficient functioning of banks, this may prove to be a drag, RBI governor D Subbarao said on the sidelines of the national finance symposium organised by the Indian Institute of Foreign Trade yesterday.

"The SLR certainly must be brought down although you must remember that it has protected us in the crisis because banks had liquidity," the RBI governor said.

SLR limits the amount of deposits available with banks for lending activities. Banks in India are required to invest 24 per cent of the deposits with them in government bonds as reserves. RBI had, last December, allowed banks to bring this down by one percentage point to ease liquidity pressure.

Alternatively, the governor said, the RBI is weighing reintroduction of inflation indexed bonds, although it was not sure about its success after an earlier attempt failed miserably.