The real reason behind Reserve Bank of India's SLR cut

However, it could actually be a part of Rajan's scheme of things given his clear stance on the necessity for bankers to move away from lazy banking from the day he took over as the RBI Governor in September 2013. While admitting that this could not have been achieved overnight, Rajan had said that as government finances improve, the scope of such reductions will increase. "As the penetration of other financial institutions, such as pension funds and insurance companies increase, we can reduce the need for regular commercial banks to invest in government securities," the RBI Governor had said.

The celebrated economist has actually set in motion an altogether new institutional framework that might eventually do away with SLR. This could take between five and 10 years.

A higher SLR requirement, which has been an Indian concept, has been responsible for restricting fund flows into sectors that are heavily dependent on bank funds. However, bankers were happy to park funds in SLR and earn risk-free returns. In fact, some of the PSU banks have been keeping a much higher limit in SLR than mandated by the RBI.

Rajan's current move is also a signal that the banking system will not be available for absorbing high government borrowings.