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.
- 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.
- 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.
- 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.
