The Reserve Bank of India’s three-day monetary policy review started on Wednesday (December 4). Although there seems to be a broad consensus that the repo rate — the rate at which RBI lends to other banks — is likely to remain unchanged at 6.5 per cent, there is an expectation that the central bank may announce a cut in the cash reserve ratio (CRR).
The calls for a reduction in the CRR have gained momentum amid a tight liquidity condition in the banking system and shockingly low gross domestic product (GDP) growth, which slowed to a seven-month low of 5.4 per cent in the July-September 2024 quarter. The reduction in the CRR will be a signal that the RBI is keen on easing the monetary policy without cutting the repo rate.
What is Cash Reserve Ratio?
The CRR is the percentage of a bank’s total deposits that it is required to maintain in liquid cash with the RBI as a reserve. The CRR percentage is determined by the RBI from time to time. At present, it is fixed at 4.5 per cent. Banks do not get any interest on this amount.
The CRR is a tool used by the RBI to manage inflation and check excessive lending.
Will RBI announce a cut in CRR on December 6?
While the RBI’s Monetary Policy Committee (MPC) decides on the repo rate and policy stance, the responsibility of liquidity measures lies solely with the RBI.
The RBI may reduce the CRR either by 25 basis points (bps) or 50 bps, analysts said. One basis point is one-hundredth of a percentage point. This would be the first cut in the CRR in more than 4.5 years.
“The liquidity in the banking system has tightened because of the RBI’s actions to stabilise the rupee. There have been a lot of dollar sales (by the RBI), which has affected the overall liquidity in the system. In December, liquidity will further tighten due to outflows related to payment of advance tax, goods and services tax (GST), and quarter-end demand for credit. Under this situation, some kind of a permanent measure can be announced (by the RBI), which could be a CRR cut or OMO purchase,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
The RBI has been selling dollars in the forex market to check the rupee volatility caused due to continued Foreign Portfolio Investors (FPI) selling and strengthening of the US dollar. Since October 1, the rupee has depreciated nearly 1 per cent against the dollar. The country’s forex reserves have fallen by nearly $45 billion between October 4 and November 22, on account of RBI’s intervention in the forex market to stabilise the rupee.
The MPC is likely to keep the repo rate unchanged at 6.5 per cent in the policy.
What will be the impact of a CRR cut?
If RBI decides to cut the CRR by 50 bps, it would free up Rs 1.10 lakh crore to Rs 1.2 lakh crore of bank liquidity parked with the RBI. In case of a 25 bps reduction, Rs 55 crore to Rs 60 crore of additional funds will be available with banks.
The surplus liquidity can be used by banks for lending, which would help spur economic growth.
“A CRR cut will free up bank money, which can further be deployed for lending. There is a chance that banks may pass on the benefits of this CRR cut to borrowers. Usually, the cut in CRR is net interest margin (NIM) accretive for banks,” said VRC Reddy, Head Treasury, Karur Vysya Bank.
When did the RBI last reduce the CRR?
The Reserve Bank had last cut the CRR in March 2020 during Covid. It reduced the CRR from 4 per on March 28, 2020, after keeping it unchanged at 3 per cent for the previous seven years. Since March 2020, the CRR has been raised three times. It was last changed to 4.5 per cent on May 21, 2022.