The Cabinet has approved bringing an ordinance to remove the statutory liquidity ratio (SLR) in a bid to increase liquidity for the private sector.
Announcing the decision, Finance Minister P Chidambaram said the Reserve Bank of India, if it wished, could set a fresh rate later.
The ordinance will also amend the Banking Regulation Act 1949, under which banks must maintain a minimum SLR of 25 %, which meant that at least 25 per cent of their deposits had to be kept in government securities.
The amendment will give the RBI operational flexibility to lower the SLR.
"The government’s move will help in increasing liquidity for private sector without increasing the money supply," said M.V. Nair, CMD, Union Bank of India. It reflects the government's confidence in the robustness of the economy."
Bankers feel that the RBI may not allow the interest rate to come down immediately, as inflation is still a matter of concern. However, the government has now sent a strong signal that it will not allow any liquidity crunch to hamper economic growth.
But bankers were of the view that the RBI will not do away with the SLR altogether, but will lower it to around 20 per cent.