The Reserve Bank of India’s (RBI) Monetary Policy Committee, on Friday, announced a reduction in the cash reserve ratio (CRR) to 4 per cent from 4.5 per cent, while keeping the key interest rate unchanged at 6.50 per cent. The move is expected to ease the liquidity situation in the system and while ensuring overall economic stability. RBI Governor Shaktikanta Das, during his speech, said, “Even as liquidity in the banking system remains adequate, systemic liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows. To ease the potential liquidity stress, it has now been decided to reduce the cash reserve ratio (CRR) of all banks to 4.0 per cent of net demand and time liabilities (NDTL) in two equal tranches of 25 bps each with effect from the fortnight beginning December 14, 2024 and December 28, 2024.”
This will restore the CRR to 4 per cent of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022. “This reduction in the CRR is consistent with the neutral policy stance and would release primary liquidity of about Rs 1.16 lakh crore to the banking system,” he said. The CRR is the percentage of a bank’s total deposits that it must keep as reserves in cash with the central bank, ensuring liquidity and controlling inflation.
Experts and economists welcomed the move by the RBI MPC while maintaining that it reflects the central bank’s nuanced approach to addressing India’s economic challenges, balancing the need to stimulate growth while managing persistent inflationary pressures. Dr V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said that the monetary policy has delivered exactly what the economy and markets need in the present context. “The decision to cut the CRR by 50 bps 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,” he added.
A report by SBI Capital Markets stated, “The CRR cut is expected to flush Rs 1.16 trillion in the banking system which faced minor deficits towards Nov’24 end due to FX and tax outflows after flush liquidity throughout Nov’24 (averaging Rs 1.5 trillion). Direct tax outflows in Dec’24, and continued FPI selling had the potential to constrain rupee liquidity and CRR cut will be warmly welcomed by the markets.”
Anitha Rangan, Economist, Equirus, agreed, “As widely expected, RBI has held its policy rate at 6.5 per cent, while announcing a CRR cut of 50 bps in two tranches of 25 bps each over the next two fortnight. Doing this RBI has provided adequate liquidity and eased the short term borrowing, while keeping the longer term well anchored.”
Dharmakirti Joshi, Chief Economist, CRISIL, said, “The CRR was cut to prevent excessive draining of liquidity from the economy, which typically curbs economic growth. After two reductions, the CRR requirement will be back to the pre-pandemic level of 4 per cent this fiscal.”
Dhiraj Relli, MD & CEO, HDFC Securities, said, “While liquidity remains tight, given the focus on inflation control, this measure may prolong the process of bringing inflation under control unless the fresh agriculture crop arrivals result in a sharp fall in prices or growth continues to remain sluggish. Equity markets got what they wanted and hence have taken the policy outcome in their stride.”
The CRR cut, while injecting additional liquidity into the banking system, will enable banks to lower lending rates and increase credit availability, particularly for sectors struggling with subdued demand. Narinder Wadhwa, Managing Director, SKI Capital, said, “The CRR reduction will likely benefit rate-sensitive sectors such as real estate, automobiles, and consumer durables by lowering borrowing costs and enhancing liquidity. However, the RBI remains cautious about creating excess liquidity, which could lead to asset bubbles or speculative activity in overvalued markets.”
The CRR cut is also expected to lend slight support to NIMs for banks, Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS, said, while adding, “With a rate cut possible in Feb’25, banks with higher share of floating rates would face pressures on margins, as CoF would revise downwards with a lag. The latest data shows convergence of credit and deposit growth rates, mainly owing to slowdown in credit growth. Asset quality challenges especially amongst banks with the higher exposure to the unsecured segments was visible in the previous quarters and we expect stress to persist in H2, thereby keeping credit costs higher in H2. Currently, we continue to prefer the larger banks with our top picks being HDFC Bank, ICICI Bank, SBI and Bank of Baroda.”
Economists also opined that a CRR cut by 50 Bps provides adequate signalling with respect to the direction of monetary policy going forward. Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund, said, “In the near term, we could anticipate other fine tuning liquidity measures such as repo auctions apart from screen-based OMO in case core liquidity tightens further. Given the Q2FY26 CPI projections, in the absence of any incremental inflation shocks, the Feb review could be live for a repo rate reduction.”
Achala Jethmalani, Economist, RBL Bank, said, “The RBI has lowered the reserve ratio by 0.50 per cent which would infuse permanent liquidity to the tune of Rs 1.16 lakh crore into the system over the course of next two fortnights; favouring banks and keeping money market rates benign. At 4.00 per cent, the CRR is now at pre-Covid levels. The surplus liquidity conditions in the system augur well for faster monetary transmission as and when the window to cut opens-up. The time is ripe for deposits to be locked-in and expect softer borrowing rates in H1 of next year.”
Hemant Jain, President, PHDCCI, said, “It will not only enhance the liquidity in the economy but also boost business sentiments as it signifies the futuristic softening of interest rates in the country.We are hopeful that the economy will attain its high growth trajectory once again in the coming quarters.”