UPSC Prelims 2015 GS Paper I · Q22 of 100 Economy easy

When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?

  1. (a) India's GDP growth rate increases drastically
  2. (b) Foreign Institutional Investors may bring more capital into our country
  3. (c) Scheduled Commercial Banks may cut their lending rates ✓ UPSC's answer
  4. (d) It may drastically reduce the liquidity to the banking system

Why the answer is (c)

• The SLR is the share of deposits banks must hold in liquid assets such as government securities.

• A 50-basis-point cut frees funds that banks can lend, lowering their cost of funds and enabling them to cut lending rates — option (c).

• It increases, not reduces, liquidity (d); it has no direct link to FII flows (b) and cannot 'drastically' raise GDP growth (a).

• Hence option (c).

Why the other options are wrong

(a) India's GDP growth rate increases drastically
A small SLR cut cannot drastically change GDP growth.
(b) Foreign Institutional Investors may bring more capital into our country
SLR has no direct effect on FII inflows.
(d) It may drastically reduce the liquidity to the banking system
An SLR cut increases, not reduces, liquidity.

Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2015, held on 23 August 2015. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.

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