The Reserve Bank of India (RBI) increases the Statutory Liquidity Ratio (SLR) to regulate the monetary policies in the country. The SLR is the percentage of deposits that banks have to maintain in the form of liquid assets, including cash, gold or approved securities, with the RBI. Here are some reasons why the RBI may increase the SLR:
Tightening Monetary Policy: The RBI may increase the SLR as a part of its monetary policy to tighten the money supply in the economy. This helps in controlling inflation as reducing the liquidity in the system reduces the amount of money available for lending.
Consumer Credit Demand: An increase in consumer credit demand may lead to an increase in SLR to control credit expansion, keeping a check on the loan defaults.
Foreign Exchange Reserve Management: Countries with a current account deficit may increase the SLR to manage their foreign exchange reserves, and to reduce the country's dependence on external borrowing.
Economic Instability: Increasing the SLR may help stabilize the banking system and improve the liquidity position of banks during economic turbulence.
SLR-to-Deposit Ratio: The RBI may increase the SLR to maintain the SLR-to-deposit ratio set under the Banking Regulation Act, 1949.