The Reserve Bank of India’s (RBI) final monetary policy committee (MPC) meeting under Governor Shaktikanta Das, whose term ends next week, began on December 4. While the repo rate is widely expected to remain steady at 6.5%, all eyes are on a potential cash reserve ratio (CRR) cut—a move that could unleash significant liquidity into the banking system.
Tight liquidity and sluggish growth are fueling expectations for the first CRR cut in over four years. GDP growth slumped to a seven-quarter low of 5.4% in the July-September quarter, amplifying calls for measures to spur lending. Analysts predict a reduction of 25-50 basis points, which could inject between Rs 55,000 crore and Rs 1.2 lakh crore into banks for fresh loans.
Economists believe this measure is more likely than a repo rate cut, as it directly addresses liquidity without affecting interest rate stability—a critical balance amid persistent inflation concerns.
The CRR, currently at 4.5%, mandates banks to park a percentage of their deposits with the RBI. A cut frees up these reserves, enabling banks to lend more. Unlike other tools like repo rate adjustments, a CRR reduction has an immediate impact on liquidity without any interest burden for banks.
This meeting is pivotal not just for policy decisions but also for Governor Das. With no official word on his reappointment, the pressure to address conflicting economic signals—stabilizing inflation versus catalyzing growth—has intensified.
Reports suggest he may receive a two-year extension, but no formal confirmation has been made.
“If the RBI cuts CRR by 50 basis points, it could significantly ease liquidity pressures caused by advance tax payments, GST outflows, and quarter-end credit demand,” said Madan Sabnavis, Chief Economist at Bank of Baroda.
A CRR cut, unlike a repo rate cut, also helps counterbalance the RBI’s dollar sales in forex markets, which have tightened liquidity. Since October, the central bank’s interventions to stabilize the rupee have drained nearly $45 billion from forex reserves.