The reduction in cash reserve ratio by 100 basis points in a staggered manner will ease the cost of funding for banks and will also help improve their net interest margins by 7 bps, Reserve Bank of India's Governor Sanjay Malhotra said during post policy conference on Friday.
The CRR, which has traditionally hovered around 4%, was temporarily reduced by 1% during the Covid-19 pandemic to provide liquidity relief.
Governor Malhotra noted that maintaining a 4% CRR may no longer be necessary, and a 3% ratio will be sufficient for liquidity management. This reduction will free up more funds for banks to deploy in lending activities, thereby lowering their cost of funds and enhancing profitability.
He said that the reduction in CRR is designed not only to provide liquidity but also to accelerate the transmission of monetary policy rate cuts to the real economy. Historically, transmission of policy rate changes to lending and deposit rates has taken 6-9 months. However, this time around, the RBI has observed a much faster pace.
Since the 25 bps cut in repo rate in February, deposit rates have already fallen by an average of 27 bps, with some banks reducing rates by up to 40 bps.
Outstanding credit has decreased by 17 bps and fresh loan rates, though slower to adjust, have started to decline by about 6 bps within just four months of the initial rate cut.
"This is a good transmission pace, much faster than previous cycles. But we want to do it even faster, which is why we have frontloaded some of our liquidity," he said.
The RBI's Monetary Policy Committee cut the CRR by 100 bps from 4% to 3% of Net Demand and Time Liabilities, to be done in a staggered manner of 25 bps each in four tranches from the fortnight beginning Sept. 6.
The cut would release primary liquidity of Rs 2.5 lakh crore by December 2025.
MPC also cut the benchmark repo rate by 50 bps for the third straight time to 5.5% with a 5:1 majority. Saugata Bhattacharya voted for a 25 bps cut in repo rate, while the others voted for a 50 bps cut.
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