RBI Monetary Policy: What Does A CRR Cut Mean?
Even as liquidity in the banking system remains adequate, systemic liquidity may tighten in the coming months, RBI Governor Das said.
India's Monetary Policy Committee, led by RBI Governor Shaktikanta Das, cut the Cash Reserve Ratio by 50 basis points to 4% on Friday.
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.
To ease the potential liquidity stress, it has now been decided to reduce the CRR of all banks to 4% of net demand and time liabilities, in two equal tranches of 25 basis points each, with effect from the fortnight beginning Dec. 14, 2024 and Dec. 28, 2024.
This will restore the CRR to 4% of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022, the governor said. 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 added.
The CRR is the percentage of total deposits a scheduled commercial bank must have in cash to operate risk-free. The Reserve Bank of India decides the amount and keeps it for financial security. The bank cannot use this amount for lending and investment purposes and does not get any interest from the RBI on it.
A cut in the CRR frees up money for banks to lend, boosting credit growth in the economy. Higher system liquidity will soften short term interest rates and can reduce the pressure on bank deposit rates.
On Friday, the RBI MPC kept the benchmark repo rate unchanged at 6.5% and maintained a neutral stance. The Reserve Bank of India has also decided to increase interest rate ceilings on foreign currency non-resident bank deposits with immediate effect, Governor Shaktikanta Das said during monetary policy announcement.
