Every bank must have a specified portion of their Net Demand and Time Liabilities (NDTL) in the form of cash, gold, or other liquid assets by the day’s end. The ratio of these liquid assets to the demand and time liabilities is called the Statutory Liquidity Ratio (SLR). The Reserve Bank of India has the authority to increase this ratio by up to 40%. An increase in the ratio constricts the ability of the bank to inject money into the economy.
RBI is also responsible for regulating the flow of money and stability of prices to run the Indian economy. Statutory Liquidity Ratio is one of its many monetary policies for the same. SLR (among other tools) is instrumental in ensuring the solvency of the banks and cash flow in the economy.