Net borrowing at home, a source of financing the fiscal deficit, includes borrowing indirectly from commercial banks through the Statutory Liquidity Ratio (SLR). What does the SLR require banks to do?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Keep some reserves in liquid form in the short term
The Statutory Liquidity Ratio (SLR) asks banks to keep some reserves in liquid form in the short term. When banks meet it by holding government securities, the government borrows from them indirectly.
Option (1) Borrow from the RBI at the bank rate — Incorrect. The bank rate is the rate at which the RBI lends to banks. It is a separate tool.
Option (2) Keep some reserves in liquid form in the short term — Correct. This is the SLR requirement.
Option (3) Buy and sell government bonds in the open market on behalf of the RBI — Incorrect. Buying and selling bonds is open market operations, done by the RBI itself.
Option (4) Keep a fraction of their deposits as cash reserves with the RBI — Incorrect. This is the Cash Reserve Ratio (CRR).
This question uses Government Budget and the Economy and Money and Banking together.
NCERT (2026-27): “5.2.1 Measures of Government Deficit … Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR). …” Money and Banking: “3.3.2 Limits to Credit Creation and Money Multiplier … Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. …” |