As expected, the The Reserve Bank of India (RBI) on Friday reduced the Cash Reserve Ratio (CRR). The six-member Monetary Policy Committee (MPC) raised the repo rate – the key policy rate – by 50 basis points (bps) from 4 per cent to boost liquidity in the financial system, even as it remained unchanged for the 11th consecutive time at 6.5 per cent. the time
However, the rate-setting panel lowered the GDP growth estimate in FY2025 to 6.6 percent from the previously estimated 7.2 percent and revised the consumer price index-based inflation (CPI), or retail inflation, upward to 4.8 percent. It was earlier estimated at 4.5 percent in the current financial year.
Announcing the policy, RBI Governor Shaktikanta Das said, “It has now been decided to reduce the cash reserve ratio of all banks to 4 per cent of total demand and time liabilities (NDTL) to equal two to reduce potential liquidity stress. Installments of 25 bps each with effect from December 14, 2024 and fortnight commencing December 28, 2024.”
The reduction in CRR – the percentage of a bank’s total deposits that it is required to keep as a reserve for liquid cash with the RBI – will release primary liquidity of around Rs 1.16 lakh crore to the banking system.
Due to advance tax and goods and services tax (GST) tax outflows at the end of this month, currency negotiable instruments (CIC) are likely to rise and outflows are likely to reduce liquidity in the banking system in the next few months. from Foreign Portfolio Investors (FPIs) in the last two months. The capital freed up due to CRR reduction will be used by banks to meet increased credit demand, thereby positively impacting the net interest margin (NIM) of lenders.
With this reduction, the CRR rate has returned to pre-pandemic levels. The last time the CRR was cut was in March 2020, when the RBI cut it by 100 bps to 3 percent. A basis point is one hundredth of a percentage point.
As expected, the RBI’s Monetary Policy Committee, in a 4:2 majority, left the repo rate – the rate at which the RBI lends to banks to meet their short-term funding needs – unchanged at 6.5 per cent while hurting inflation. economy. It has also decided to continue the neutral monetary policy. Two external MPC members Nagesh Kumar and Ram Singh voted in favor of reducing the policy repo rate by 25 bps.
CPI inflation hit a 14-month high of 6.21 percent in October 2024, up from 5.5 percent in September.
“High inflation reduces disposable income in the hands of consumers and reduces private consumption, which negatively affects real GDP growth. “Increased incidence of adverse weather events, heightened geopolitical uncertainty and volatility in financial markets pose downside risks to inflation,” Governor Das said.
The MPC believes that only price stability can secure strong foundations for higher growth and is committed to rebalancing inflation growth in the overall interest of the economy.
“Accordingly, the MPC has decided at this meeting to keep the policy repo rate unchanged at 6.5 percent and to continue the neutral stance of monetary policy to act appropriately, providing flexibility to monitor and assess the outlook for inflation and growth.” said
The projection of CPI inflation for FY2025 has been revised to 4.8 percent, to 5.7 percent in Q3, and to 4.5 percent in Q4. CPI inflation is estimated at 4.6 percent in the first quarter of FY2026 and 4 percent in Q2.
What does CRR deduction mean?
The move to reduce the CRR – the percentage of a bank’s total deposits that it is required to hold in liquid cash as reserves with the RBI – will free up Rs 1.16 lakh crore in the banking system, increasing banks’ lending resources.
The MPC lowered its real GDP growth projection for FY25 to 6.6 percent from the earlier estimate of 7.2 percent. The revision comes on the back of lower-than-expected real GDP growth in Q2 FY25, which fell to a seven-quarter low of 5.4 percent. The RBI had projected real GDP growth of 7 percent in the July-September 2024 quarter.
“Going forward, high-frequency indicators available so far suggest that the slowdown in domestic economic activity has eased in the second quarter of FY2025 and has since recovered, with strong festive demand and an increase in rural activity,” Das said.
End of monsoon season and expected increase in government capital expenditure may provide some boost to cement, iron and steel sector. On the demand side, rural demand is on the rise while urban demand shows some moderation at a higher base. He said that government consumption is improving and investment activities are also expected to improve.
Commenting on the policy, State Bank of India Governor CS Setty said, “The monetary policy announcements made today are pragmatic, clear and mark important milestones in the regulatory and development policy arena.”