RBI: Need to Reduce Statutory Liquidity Ratio

PUNE, India -- The statutory liquidity ratio--the minimum bond-holding requirement of banks--needs to be brought down in India, central bank Governor Duvvuri Subbarao said Friday.

However, a number of conditions have to be met before making such a decision, Mr. Subbarao said during a speech at an academic institution. He didn't specify the conditions that need to be met.

Currently, the statutory liquidity ratio is 24%, and Mr. Subbarao said it is "considered by many people as high."

The high statutory liquidity ratio, according to some analysts, is aiding the government's large borrowing program.

The government has expanded its borrowing program twice in the current fiscal year ending March 31 to fund a likely sharp increase in its fiscal deficit.

India is expected to overshoot its aim of keeping its fiscal deficit within 4.6% of gross domestic product in the current fiscal year by as much as one percentage point.

Government expenditure remained elevated ahead of recently concluded elections to five state assemblies, while slowing growth hurt tax revenues. India's fiscal deficit reached 105% of its full-year target in the first 10 months of the fiscal year, according to recent government data.

Mr. Subbarao Friday also said India's fiscal deficit is high.

The government's large borrowing program is seen as one of the causes for the acute cash shortage in the banking system.

However, a reduction in the SLR may not be imminent, analysts said, as most banks currently hold bonds in excess of the minimum requirement, amid a slowdown in the demand for credit from customers.

Earlier this week, RBI Deputy Governor Subir Gokarn echoed that view, saying that a cut in the SLR would not be effective in easing the liquidity shortage.

The RBI is widely expected to cut the cash reserve ratio, or the minimum percentage of deposits that banks need to hold in cash, by half a percentage point to 5.00% to ease liquidity conditions, when it meets to review monetary policy on Mar. 15.

The government's borrowing program for the fiscal year starting April 1 will be announced a day later as part of the government's Budget presentation.