RBI Monetary Policy: CRR cut to free up Rs 1.16 lakh crore

Mumbai: The Reserve Bank of India's monetary policy committee delivered a cut in the cash reserve ratio (CRR) by 50 basis points to 4%, as the central bank expects liquidity to be tight in the coming months. Market participants are viewing this CRR cut as a signal that the monetary policy process toward a rate cut has started.

This cut, which will be done in two tranches of 25bps each, on December 14 and December 28, will free up excess funds of ₹1.16 lakh crore, which banks would be free to use as per their discretion.

CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.

"The tone of the Monetary Policy Committee was neutral today, but the actions clearly indicate a rate cut coming. This CRR cut definitely means that we are moving towards an accommodative stance and the process of a rate cut has started. By the next MPC, the borrowing of the government plus the budget will be in the public domain, so things will be clearer for the MPC to decide," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.

The central bank governor said core liquidity is expected to be under pressure in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows.

"Given the challenges around timing and window of conventional rate cuts, along with foreign exchange cost of rate cuts - like liquidity implication costs and imported inflation amidst uncertain global dynamics - a CRR cut of 50 basis points was the least costly measure for the Reserve Bank of India," said Madhavi Arora, lead economist at Emkay Global Financial Services.

"In the coming weeks, we can see that we are going into a phase where liquidity is going to be very tight in the later part of December and continuing into January and perhaps into February. Therefore, we thought it was time to normalise CRR levels," said Governor Shaktikanta Das, addressing the media. The CRR was increased in April 2022 as a temporary measure and was maintained at 4.5%.