The Reserve Bank of India (RBI) has cut the Cash Reserve Ratio (CRR) by 50 basis points to 4% and reduced its GDP forecast to 6.6% from the earlier 7.2%, Governor Shaktikanta Das announced on Friday, December 6, during his monetary policy decision announcement speech.
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What is cash reserve ratio (CRR)?
The CRR is the percentage of total deposits a bank must hold back in cash and not lend out or invest to cover potential risks. The RBI determines this percentage, and all scheduled commercial banks must follow it, while regional rural banks and non-banking financial companies (NBFCs) are excluded.
The RBI cut the CRR because “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,” Das said.
He added that it would release about ₹ 1.16 lakh crore of liquidity to the banking system. This is despite the repo rate being kept unchanged at 6.5% for the 11th consecutive time.
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“The global environment is becoming increasingly challenging, with markets preparing for a stronger dollar, higher capital costs, and significant investment flows back to the US, limiting the options for RBI if growth was to slow down significantly,” said Suman Chowdhury, Executive Director & Chief Economist, Acuitè Ratings.
He added that this is what can persuade the central bank to consider non-rate measures such as the CRR cut.
This came at a time of dilemma for the RBI’s Monetary Policy Committee (MPC) since India’s inflation is rising and gross domestic product (GDP) growth is slowing. The repo rate generally influences both of these factors in different ways.
India’s retail inflation rose to 6.21% in October 2024, compared to 4.87% in October 2023, primarily due to rising vegetable prices.
This crossed the inflation target limit of the Reserve Bank of India (RBI).
Meanwhile, the GDP growth rate slowed down to 5.4% during the second quarter of the financial year 2024-25, compared to 8.1% in the second quarter of 2023-24, due to the falling growth rate in manufacturing, consumption, and mining.
The RBI also revised its GDP growth forecast, cutting it to 6.6% from the earlier 7.2%. Third quarter forecast is at 6.8%, fourth quarter forecast is at 7.2%, and for the first quarter of 2025-26 it is projected at 6.9% and 7.3% in the second quarter.
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The CRR reduction will happen in two equal tranches of 25 bps each from December 14, 2024 and December 28, 2024.
The 4% CRR was what prevailed before the policy tightening cycle started in April 2022.
When it comes to the future outlook of the monetary policy, Rajeev Radhakrishnan, CIO of Fixed Income at SBI Mutual Fund said, “The CRR cut by 50 Bps provides adequate signalling with respect to the direction of monetary policy going forward. 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,” he said.
