To deal with the potential liquidity pressure, the RBI while announcing its liquidity related measures decided to reduce the reserve ratio of all banks by 50 basis points. As of now, the CRR or reserve ratio has come down to 4 percent.
The said change is going well on the expected lines. The reduction of the CRR will improve liquidity in the country’s banking system which may be disrupted over time, thus supporting economic activity without having a direct impact on the repo rate.
RBI’s Das noted that the CRR cut is expected to inject Rs 1.6 lakh crore into the banking system, which has been implemented in two 25-bps steps.
Importantly, the RBI has reduced the CRR after a long gap and for the first time since May 2022 when the rates were revised upwards to 4.5 percent from 4 percent earlier.
Das said the reduction in the Cash Reserve Ratio (CRR) is in line with the central bank’s policy stance, reflecting a balanced approach to managing cash shortages while maintaining economic stability.
Emkay in the RBI’s policy preview said, “However in this case as per Emkay Global Financial Services- unconventional policy tools like liquidity reduction can act as a good balancing act, and the conversion of CRR to the pre-Covid 4 level, which means the inclusion of Rs1 .2trn at a time when capital may move further into deficit through unsanitary FX inflows and CIC leakages.
CRR is the percentage of bank deposits that Indian banks are legally required to maintain with the apex bank to guarantee their payments.
Emkay in its note also added that since long-term VRRs are not in effect, a 50bps CRR fade cut is more likely (resulting in liquidity injection of ~Rs1.2trn). We note that the CRR is still higher than the pre-Covid level and does not even require an MPC vote. And we do not rule out easing future lending regulations to encourage less borrowing.
