Does a change in SLR and gilts products impact interest rates?
SLR reduction is not so relevant in the present context for two reasons: First, as part of the reforms process, the government has begun borrowing at market-related rates. Therefore, banks get better interest rates compared to earlier for their statutory investments in government securities. Second, banks are still the main source of funds for the government. This means that despite a lower SLR requirement, banks’ investment in government securities will go up as government borrowing rises. As a result, bank investment in gilts continues to be high despite the RBI bringing down the minimum SLR to 25 per cent a couple of years ago. Therefore, for the purpose of determining the interest rates, it is not the SLR requirement that is important but the size of the government’s borrowing programme. As government borrowing increases, interest rates, too, rise. Besides, gilts also provide another tool for the RBI to manage interest rates. The RBI conducts open market operations (OMO) by offerin