A day after he lowered bank SLR, the mandatory government bond holding requirements for banks, Reserve Bank if India (RBI) Governor Raghuram Rajan today said the cbank is all for reducing "pre-emptions" over a longer horizon for more efficiency in the financial system.
"The broader, longer term programme of five years, is that we should reduce the amount of pre-emptions we have in the system including SLR and make a more effective priority sector lending (PSL) process," Rajan said during the customary post-policy call with analysts.
Rajan drew attention towards the Nachiket Mor committee on PSL and said that the RBI is trying to make the entire process more effective.
"These are necessary changes in the system and should not be seen as tied to the monetary cycles," he added.
Various stakeholders in the system, including the banks, have been expressing reservations about the pre-emptions like the SLR and CRR. In the present scenario, banks have to set invest 22 per cent of their deposits in government securities and 4 per cent gets parked as cash reserve ratio without any interest payment.
Banks carry out lending on whatever remains, and 40 per cent of the lending as well is mandated to be done to weaker sections of the society under the PSL.
Rajan conceded that yesterday's 0.50 per cent cut in Statutory Liquidity Ratio is not going to have any real impact in the immediate future and added that banks will continue carrying excess SLR for the "foreseeable future".
The cut in the SLR holding requirement, which has the potential to release an additional Rs 40,000 crore into the system, offers banks the flexibility to manage their finances better when the credit demand will go up, he said.
"Going forward, we would investigate the conditions in both the credit market as well as the bond market and make appropriate decisions at that point," Rajan said, asserting that banks will continue to be present in the government securities market.
When asked about the limit for foreign institutional investors' investments in government securities, Rajan said the RBI is happy with their renewed interest and also acknowledged their preference for longer maturity debt of over three years.
The situation is not such at present wherein foreign investors have come close to breaching the limits on G-Sec investments and as and when the limits are closer