The SLR as a Monetary Policy Instrument in Bangladesh

The statutory liquidity requirement (SLR), as a monetary policy instrument, has experienced infrequent changes in Bangladesh. Past evidence shows that reduction in SLR produced positive impact on bank credit and investment especially prior to the 1990s. In recent times, changes in SLR and cash reserve requirement (CRR) helped to reduce inflation to some extent in some years. Since the 1990s, Bangladesh Bank has used open market operations (OMOs), more frequently rather than changes in the Bank Rate and SLR as instruments of monetary policy in line with its market oriented approach. In this context, it should be noted that lately Bangladesh depends mostly on the money market as the channel for monetary transmission rather than changes in reserve requirements. The CRR and SLR for scheduled banks are used only in situations of drastic imbalance resulting from major shocks. The effectiveness of SLR in bringing about desired outcomes, however, depends on appropriate adjustments of other indirect monetary policy instruments such as repo and reverse repo rates.