Which of the following is a direct consequence of an increase in the SLR?
Practice Questions
Q1
Which of the following is a direct consequence of an increase in the SLR?
Increased lending capacity of banks
Decreased liquidity in the banking system
Lower interest rates
Increased foreign investment
Questions & Step-by-Step Solutions
Which of the following is a direct consequence of an increase in the SLR?
Step 1: Understand what SLR (Statutory Liquidity Ratio) is. It is the percentage of a bank's net demand and time liabilities that must be maintained in the form of liquid cash, gold, or other securities.
Step 2: Recognize that when the SLR increases, banks are required to hold more liquid assets.
Step 3: Realize that holding more liquid assets means banks have less money available to lend to customers.
Step 4: Understand that when banks lend less money, there is less money circulating in the economy, which is referred to as decreased liquidity.
Step 5: Conclude that an increase in the SLR leads to reduced funds available for lending, resulting in decreased liquidity in the banking system.
