When the Reserve Bank of India reduces the Statutory Liquidity by 50 basis points, which of the following is likely to happen?

The correct option is "Scheduled Commercial Banks may cut their lending rates."

To understand why this is the most likely outcome, let us break down the concept of Statutory Liquidity Ratio (SLR) and how its reduction affects the banking system step-by-step:

1. Understanding Statutory Liquidity Ratio (SLR):
SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid assets, such as cash, gold, or government-approved securities, before providing credit to its customers. These assets are kept with the banks themselves, not with the RBI.

2. Effect of Reducing SLR:
When the Reserve Bank of India (RBI) reduces the SLR by 50 basis points (where 100 basis points = 1%):
$$50\text{basis points}=0.50\%$$ This reduction means banks are required to hold a smaller portion of their deposits in safe, low-yielding liquid government assets.

3. Impact on Lending Capacity and Rates:
With the SLR requirement lowered, banks free up resources that were previously locked in government securities. This increases the overall liquidity in the banking system, giving commercial banks more deployable funds to lend to businesses and individual consumers.
To attract borrowers and utilize these newly available loanable funds, Scheduled Commercial Banks are highly likely to lower their interest rates (lending rates).

4. Why Other Options are Incorrect:
• GDP growth rate increasing drastically: While credit expansion supports economic activity, it does not lead to a "drastic" or immediate increase in the GDP growth rate on its own.
• Foreign Institutional Investors (FIIs) bringing more capital: FII inflows depend on global factors, domestic stock market performance, and interest rate differentials, rather than a small change in SLR.
• Drastically reducing liquidity: A reduction in SLR increases liquidity in the banking system, rather than reducing it.