Statutory Liquidity Ratio refers to the amount that the commercial banks require to maintain in the form of gold or govt. approved securities (bond and shares of different companies) before providing credit to the customers. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as percentage of total demand and time liabilities.
SLR is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved liabilities (deposits). It regulates the credit growth in India.
The RBI can increase the SLR to contain inflation, suck liquidity in the market, to tighten the measure to safeguard the customers money.
In a growing economy banks would like to invest in stock market, not in Government Securities or Gold as the latter would yield less returns.
One more reason is long term Government Securities (or any bond) are sensitive to interest rate changes.
But in an emerging economy interest rate change is a common activity.
The objectives of SLR are:-
1. To restrict the expansion of bank credit.
2. To augment the investment of the banks in government securities
3. To ensure solvency of banks.