Question

How does a rise in SLR reduces capacity of the commercial banks to build their cash reserves with the RBI ?

Answer 1

SLR is concerned with maintaining the minimum reserve of assets with RBI, whereas the cash reserve ratio is concerned with maintaining cash balance (reserve) with RBI. So, SLR is defined as the minimum percentage of assets to be maintained in the form of either fixed or liquid assets with RBI. The flow of credit is reduced by increasing this liquidity ratio and vice-versa.SLR restricts the banks to pump money in the economy and, also reduces the capacity of commercial banks to build their cash reserves with RBI because the amount of cash reserves gets used as liquid assets in case of SLR rather than cash reserves.