Discussion
When RBI reduces Statutory Liquidity Ratio by 50 basis points , which of the following is likely to happen?
Answer: C
Correct answer: Scheduled Commercial Banks may cut their lending rates.
Reducing the statutory liquidity ratio releases funds that banks were obliged to hold in government securities, so more is available for commercial lending. With a larger supply of loanable funds, competition tends to push lending rates down.
The last option has the direction wrong: cutting the SLR increases liquidity, it does not reduce it. And the effects on GDP growth and foreign institutional investment are at best indirect and gradual - the word "drastically" is what makes those options wrong rather than the direction of the effect.
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