The Reserve Bank of India’s Monetary Policy Committee (MPC) has reduced the cash reserve ratio (CRR) to 4% from 4.5% to address liquidity woes, announced Governor Shaktikanta Das
RBI Governor Shaktikanta Das said that lowering the Cash Reserve Ratio (CRR) is consistent with the central bank’s neutral policy stance. This move indicates a balanced strategy aimed at managing liquidity in the banking system while ensuring overall economic stability.
Many experts had the view that the central bank should consider a reduction in the Cash Reserve Ratio (CRR) to boost increasing liquidity prior to the PMC announcements.
The RBI MPC has kept the key lending rates unchanged to 6.5% as its focus remains on bringing inflation under control.
“The Monetary Policy Committee decided by a majority of 4-2 to keep the policy repo rate unchanged at 6.5%. Consequently, the standing deposit facility (SDF) stands at 6.25% and the marginal standing facility (MSF) and the bank rate at 6.75%,” said Das.
India’s economic growth showed signs of strain, with the GDP growth rate for Q2 FY25 slipping to 5.4%, the slowest in seven quarters.
Analysts had suggested that cutting the CRR could provide much-needed liquidity to the banking system, helping stimulate economic activity.
The CRR is the percentage of a bank’s total deposits that must be maintained as reserves with the RBI. The CRR helps the central bank manage inflation, control liquidity, and regulate lending in the economy.
“The decision to cut the CRR by 50bp facilitating injection of Rs 1.16 trillion of liquidity into the system will ease the liquidity constraints and more importantly reduce the banks’ cost of funds. From the market perspective, this is an excellent policy response. Banking stocks will remain resilient,” said Dr V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
“A CRR cut would inject liquidity into the banking system, providing a cushion for economic activity without directly affecting the repo rate,” said Suman Chowdhury, Executive Director and Chief Economist at Acuité Ratings.
“If RBI goes for a 50-basis-point CRR cut, it would infuse Rs 1.15 lakh crore of liquidity into the banking system. This would balance the need for liquidity while maintaining control over inflation. Some market participants are also expecting an OMO purchase announcement to bring the yield curve lower,” said Harsimran Sahni, Executive Vice President and Head of Treasury at Anand Rathi Global Finance.
Brokerage firm Nomura highlighted in a recent report, “Slowing GDP growth, moderating credit growth, softer underlying inflation, and muted second-round effects should have provided the RBI with the confidence to begin policy easing by now, but it hasn’t. We expect 100 basis points in total cuts by mid-2025, bringing the terminal rate to 5.5%.”