Synopsis In light of India's ambitious growth targets, there is a compelling appeal for RBI Governor Sanjay Malhotra to rethink the relevance of the Statutory Liquidity Ratio (SLR). This antiquated rule compels financial institutions to allocate a significant portion of their resources to government debt, limiting their ability to invest in entrepreneurial ventures and other productive domains.
Dear Sanjay Malhotra,
As , you have sprung a surprise or two. When you cut the repo rate by 50 bps in June, instead of the usual 25 bps, many cheered your boldness and unconventional thinking. Indeed, one incisive analyst declared that only a person without a PhD in economics could have had the guts to do a 50-point cut.
May I suggest an even bolder and more unconventional move. Please abolish the (SLR). SLR obliges banks to hold a prescribed ratio (currently 18%) of their assets in the form of gold or government bonds, effectively the latter. No modern economy has anything of this sort.
If India wishes to become ‘Viksit Bharat’, it must modernise its monetary system too. If you abolish SLR in one go, too many people, including some Cabinet ministers, might faint instantly. Taking that political reality into account, perhaps you should present a plan to phase out SLR over five years.
With NDA having won several state elections by a landslide of late, political uncertainties created by the general election have disappeared. Narendra Modi is firmly in the saddle. This is the time to take what might earlier have been viewed as a risky move.
India loves its relics. From colonial-era paperwork to outdated economic controls, it clings to yesterday’s tools while pretending to build tomorrow’s economy. Few relics are as perversely persistent – or as economically suffocating – as SLR. It’s high time we say it plainly: SLR is an antiquated, distortionary, growth-killing device that has no place in a modern financial system.
For decades, SLR has forced banks to become financiers of government debt. This is both lazy banking and growth-killing banking. Instead of lending to businesses, innovators and job creators, banks are compelled to funnel a chunk of their deposits into low-yielding government securities. It’s called liquidity management. It’s better to call it forced financial subscription.
India seeks to become a $10 tn economic powerhouse. How is this possible if a regulatory chokehold limits credit flow to productive sectors? Entrepreneurs are starved of capital. Infrastructure projects crawl for lack of financing. SMEs, the backbone of job creation, struggle for affordable credit. Meanwhile, banks sit heavy with mandatory government bonds, earning predictable, mediocre returns. Interest rates for savers are lower than they should be, thanks to financial repression. This is not prudence. It’s paralysis.
Defenders of SLR cling to the tired argument that it provides ‘stability’. But that logic belongs to an age when India’s financial system was fragile, insular and poorly regulated. Today, we are living in a Basel III world, with liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) already ensuring banks have adequate buffers. Maintaining SLR on top of that is not caution – it’s redundancy masquerading as wisdom.
SLR undermines discipline. By guaranteeing the government a captive market for its bonds, the ratio shields policymakers from fiscal responsibility. Why should the government worry about overspending, or inefficient subsidies, when banks are legally obliged to buy its bonds?
This article was originally published by The Economic Times on Nov 18, 2025.
