The Reserve Bank of India’s Monetary Policy Committee (MPC) has decided to lower the cash reserve ratio (CRR) from 4.5% to 4%, aiming to ease liquidity challenges, as announced by Governor Shaktikanta Das. Highlighting the rationale, Governor Das mentioned that this reduction aligns with the central bank’s neutral policy approach. The adjustment reflects a well-balanced effort to maintain adequate liquidity in the banking sector while supporting broader economic stability.
Before the RBI’s announcement, many experts suggested that the central bank should consider lowering the Cash Reserve Ratio (CRR) to address growing liquidity needs. However, the RBI’s Monetary Policy Committee (MPC) chose to keep the key lending rate steady at 6.5%, emphasizing its commitment to controlling inflation.
“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 faced challenges as the GDP growth rate for Q2 FY25 dropped to 5.4%, marking the slowest pace in seven quarters. Experts had proposed that a reduction in the Cash Reserve Ratio (CRR) could inject essential liquidity into the banking system, potentially boosting economic activity.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 performance weakened in Q2 FY25, with the GDP growth rate declining to 5.4%, its slowest in seven quarters. Analysts had recommended a reduction in the Cash Reserve Ratio (CRR) as a measure to inject liquidity into the banking system and revive economic activity.
“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.
In a recent report, brokerage firm Nomura observed that slowing GDP growth, moderate credit expansion, softer inflation trends, and limited secondary effects should have encouraged the RBI to start easing its policies. However, this has not yet occurred. The firm anticipates a total rate cut of 100 basis points by mid-2025, bringing the terminal rate down to 5.5%.