Correct Option
When the Reserve Bank of India reduces the Statutory Liquidity Ratio (SLR), it lowers the proportion of their Net Demand and Time Liabilities (NDTL) that commercial banks are required to hold in liquid assets such as government securities. This action releases a greater portion of banks' funds, making them available for credit disbursement to the public and businesses. Consequently, with increased liquidity and funds for lending, scheduled commercial banks are likely to reduce their lending rates to stimulate demand for credit.
Incorrect Options
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Option (a): A 50 basis point reduction in the SLR is a monetary policy measure that influences credit availability and cost. While it can support economic activity, a drastic increase in India's GDP growth rate is influenced by a multitude of factors, including fiscal policy, global economic conditions, and structural reforms, and is unlikely to be solely or drastically driven by this specific SLR adjustment.
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Option (b): Foreign Institutional Investor (FII) inflows are primarily driven by factors such as global interest rate differentials, domestic economic growth prospects, corporate earnings, market sentiment, and geopolitical stability. A marginal reduction in SLR does not directly or significantly influence FII decisions to bring more capital into the country.
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Option (d): A reduction in the Statutory Liquidity Ratio directly increases the liquidity available to the banking system. By requiring banks to hold less in statutory reserves, more funds become available for lending, thereby enhancing, not reducing, the system's liquidity.