RBI reduces Cash Reserve Ratio (CRR) for banks to 4%

To address the likely liquiditiy pressure, the RBI while announcing its liquidity related measures has decided to reduce the cash reserve ratio across banks by a sharp 50 basis points. Henceforth, the CRR or cash reserve ratio comes down to 4 per cent.

The said change is well on expected lines. A reduction in the CRR would improve liquidity in the country's banking system which may suffer in due course, thus supporting economic activity without directly impacting the repo rate. 

RBI's Das noted that the cut in CRR is expected to infuse Rs 1.6 lakh crore into the banking system, implemented in two 25-bps tranches.

Importantly, the RBI has slashed the CRR after a long gap and for the first time since May 2022 when the rates were revised higher to 4.5 per cent from 4 per cent earlier.

Das stated that the reduction in the Cash Reserve Ratio (CRR) aligns with the central bank's neutral policy stance, reflecting a balanced approach to managing liquidity while maintaining economic stability.

Emkay in its preview note on the RBI policy said, "Nevertheless this time as per Emkay Global Financial Services- non-conventional policy tools like liquidity easing could act as a good balancing act, with a CRR reversal to pre-Covid 4 per cent level, implying an infusion of Rs1.2trn at a time when core liquidity may steadily move to a deficit ahead with unsterilized FX intervention and CIC leakages.

The CRR is the percentage of the bank deposits that banks in India are mandatorily required to keep with the apex bank for securing their solvency.

Emkay in its note also added that with long-term VRRs turning ineffective, a blunt 50bps CRR cut is a high possibility (leading to ~Rs1.2trn liquidity infusion). We note that CRR is still higher than pre-Covid level and does not even require an MPC vote. We also do not rule out some easing in regulatory lending norms ahead to stimulate the waning credit offtake.

After the cut in the CRR, LKP Securities in its note released today said, " A reduction in the CRR lowers the proportion of deposits banks are required to hold as reserves with the RBI, thereby releasing additional funds into the system. This will enable banks to lend ₹1.16 tn in the system, supporting credit growth and stimulating economic activity, potentially boosting profitability."

However, since the repo rate remains unchanged, the cost of borrowing for banks does not decrease immediately, which means lending rates might not reduce significantly in the short term. This move reflects the RBI’s intent to stimulate the economy by easing liquidity constraints while maintaining a cautious stance on inflation. Our view remains positive on the banks, added the brokerage.

AR Hemant, Associate Vice President, BankBazaar.com said, CRR, or Cash Reserve Ratio, is the portion of deposits banks are required to park with the central bank. When the CRR is cut, banks get access to more funds for lending. This means better liquidity in the system. For borrowers, it can mean lower interest rates and easier access to loans. Please note that once the repo rate itself starts to fall, hopefully no later than February, there will be an equal reduction in the rates of loans such as home loans which are benchmarked to the repo rate. Repo-benchmarked home loans are more transparently priced and their rate adjustments happen automatically within three months of changes in the repo rate.

Today, the lowest home loan rates are as low as 8.20. If you're paying a substantial premium above this mark, consider a refinance to a repo-linked home loan with a bank, added the expert.