Will Reserve Bank go for a CRR cut?

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Last Updated06/12/2024

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.

The Reserve Bank of India (RBI) commenced its three-day monetary policy review on December 4, 2024, amid speculation about possible liquidity measures to support the economy. While the consensus suggests the repo rate will remain unchanged at 6.5%, calls for a reduction in the Cash Reserve Ratio (CRR) have gained momentum due to tight liquidity conditions and slowing economic growth.

The CRR is the proportion of a bank's total deposits that must be maintained as liquid cash with the RBI, earning no interest. At present, it is set at 4.5%. This monetary tool helps the RBI manage inflation and regulate lending in the economy.

The push for a CRR reduction stems from multiple factors:
Economic Slowdown: GDP growth fell to 5.4% in Q2 FY25, its lowest in seven quarters, highlighting the need for policy measures to stimulate the economy.
Liquidity Tightness: RBI’s interventions to stabilize the rupee through dollar sales have drained liquidity. Upcoming tax outflows and credit demand by the quarter’s end are expected to exacerbate the situation.
Forex Market Pressures: The rupee has depreciated nearly 1% against the dollar since October, with forex reserves dipping by $45 billion between October and November due to RBI's interventions.
A CRR cut would signal a dovish stance by the RBI, addressing liquidity concerns without altering the repo rate.

If the RBI reduces the CRR:
- 50 Basis Points (bps): An estimated ₹1.1–₹1.2 lakh crore in liquidity would be unlocked.
- 25 Basis Points (bps): Approximately ₹55–₹60 crore would be released into the banking system.
This surplus liquidity could be channeled into lending, spurring economic activity. Additionally, banks might pass on the benefits to borrowers, reducing lending rates and boosting credit uptake.

The last CRR reduction occurred during the pandemic in March 2020, when it was lowered to 3%. It has since been incrementally raised, reaching 4.5% in May 2022.