Explained: Can Cuts In Cash Reserve Ratio Stem Growth in Economy?

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) is set to meet on December 6. While repo rates are expected to remain unchanged, the central body is likely to slash the cash reserve ratio (CRR).

CRR is a regulatory measure under which banks are required to keep a certain percentage of their total deposits with the RBI. A cut in CRR will infuse liquidity into the system, thereby ensuring credit growth. Currently, CRR stands at 4.5%

Notably, this will be the first cut in CRR since 2020 wherein the central bank brought it down by 100 bps to 3%. It gradually increased to 4% in February 2021, followed by 4.5 % in May 2022.

Slashing of CRR can prove to be beneficial for the banking sector as additional liquidity will propel them to disburse loans for lending purposes. This will stem growth in credit growth. Currently, RBI’s job is to keep inflation in retail inflation in check.

While commenting on RBI’s inflation forecast Emkay Research said, “Even as the RBI’s growth/inflation forecast will see significant downward/upward revisions, an immediate rate cut may not be easy for the MPC to justify, especially as their commentary has been assertive on durable disinflation being the primary mandate.”

The brokerage suggested that non-conventional policy tools like liquidity easing bodes well for the economy. It suggested that a CRR reversal at a pre-covid level of 4% can infuse ₹1.2 trillion into the banking system.

On the interest rate front, experts feel that a rate cut can come into force in February 2025.

An SBI research report said “We do not foresee rate cut during the current FY (financial year). First rate cut and further change in stance likely in April 2025.”

It advised the central bank to not go for rate cuts in the second quarter as inflation remains at elevated levels.

Suresh Darak, founder, Bondbazaar, said “In the last MPC meeting in October, RBI had held rates but changed its stance to neutral led by cooling of inflation at that point. The recent data points to higher inflation of 6.21 per cent in October and lower GDP growth of 5.4 per cent in the second quarter, which puts RBI in a tricky position, acting as a dampener to hopes of a rate cut.’’

He added, “While pressure would mount on the RBI to cut rates for boosting growth, the recent higher inflation along with the weakening of the INR against the dollar over the last couple of weeks would also play on the MPC’s mind.’’