BT Banking & Economy Summit : Has CRR run its utility?

Given that India’s banking system is grappling with a liquidity deficit, questions have been raised about the role of the Cash Reserve Ratio (CRR). It has been debated whether the CRR, which mandates banks to hold a portion of their deposits with the Reserve Bank of India (RBI), remains relevant in its current form. While the CRR has long been a crucial component of monetary policy, has it lost its effectiveness in the current banking landscape?  

This issue was the focus of discussion at the Business Today Banking & Economy Summit and Best Banks Awards, during a panel session titled ‘Deposit and Flows: The Macro Challenges

“CRR has been used more to ensure the integrity of the system rather than a monetary policy tool,” says Madan Sabnavis Chief Economist at Bank of Baroda, highlighting a shift in its purpose over time. With the banking sector subject to stringent liquidity requirements, there is growing concern that the CRR may no longer be the most efficient mechanism for managing liquidity.

Madhavi Arora, Chief Economist at Emkay Global,  emphasized the tight liquidity conditions imposed by the Liquidity Coverage Ratio (LCR) norms. “The LCR norms are too tight; there could be leeway on the other side to let banks breathe in terms of easing some liquidity from the CRR,” she suggests. Given that banks are already bound by multiple regulatory liquidity constraints, easing the CRR requirement could provide them with much-needed operational flexibility.

Despite these concerns, the concerns were raised against completely eliminating CRR as a policy tool. Mridul Saggar, Professor and Head of the Centre for Macroeconomics, Banking & Finance at IIM Kozhikode acknowledges that while he is not worried about the current level of CRR impacting financial stability, he is concerned about its complete removal. “I’m not worried that the level of CRR would have an impact on financial stability, but I’m worried if it is completely taken off as a tool,” he warns. 

As a potential solution, Sabnavis suggests making the CRR more effective by aligning it better with LCR requirements. “Since we have to live with the CRR, if we can make it more effective in terms of adjusting it in the LCR, it will help the banking system a lot,” he explains. Such an approach could strike a balance between maintaining financial stability and providing banks with the necessary liquidity flexibility.