MUMBAI: Even as the Reserve Bank of India’s Monetary Policy Committee (MPC) delivered a widely anticipated 50 basis point cut in the repo rate – bringing it down to 5.5 per cent, the lowest since August 2022 – it’s the central bank’s 100 basis point cut in the Cash Reserve Ratio (CRR), spread over four tranches, that has emerged as the real booster for the banking sector.
Together, these twin policy moves aim to revive flagging economic momentum. But while the repo cut garnered headline attention, senior bankers say the CRR reduction – which will release Rs2.5 lakh crore into the banking system at zero cost – is the real shot in the arm for lenders grappling with a funding squeeze.
Liquidity over lending rate pressure
Banks have been under mounting pressure to mobilise deposits in recent months. Even before this rate cut, many lenders had little room to reduce deposit rates due to a tight funding environment, as surplus liquidity has progressively dried up, though there has been slight improvement on that front, of late.
Funds are increasingly flowing into capital markets, especially mutual funds and SIPs, making deposit mobilisation even tougher.
In such a scenario, repo rate cuts – while easing lending rates externally – add to the internal pressure on margins, especially since many new retail and SME loans are linked to external benchmarks such as the repo itself.
“The cost of funds hasn’t come down significantly, but the lending rate has to drop asrepo falls at the time of the reset. That compresses spreads,” said a public sector bank executive.
In fact, home loans priced at 8.5 per cent had already left little margin for banks, with profitability hinging on cross-selling and customer stickiness. With a cumulative 100 bps cut in repo during the calendar year, some home loans may now be loss-making on an absolute basis.
Rs2.5 lakh crore cost-free cash
This is where the CRR cut steps in as a timely cushion. The move – effectively reducing the amount banks must park interest-free with the RBI – places Rs2.5 lakh crore of low-cost funds directly into the system, enhancing banks’ ability to lend without scrambling for deposits or pushing down deposit rates any further.
“The repo cut adds pressure on loan pricing; the CRR cut adds oxygen to the balance sheet,” a senior treasury official put it succinctly. Some banks have already begun to cut deposit rates, but many caution that it is not sustainable – especially if they wish to grow their credit books in a competitive, rate-sensitive environment.
The contrast with past monetary cycles is stark. Earlier, repo rate cuts were sufficient to ease liquidity and drive rate transmission. But today, with a structural shift in the savings landscape and higher competition from capital markets for household savings, liquidity injections like CRR cuts make a far more immediate impact.
Moreover, even credit growth has shown signs of slowing recently — a reflection not just of demand-side weakness but also supply-side constraints, including the cost and availability of funds.
A calculated twin strike
This rare combination – a 50 basis point cut in the repo rate and a 100 basis point reduction in CRR – marks a strategic shift in RBI’s policy delivery.
While not unprecedented, it underscores the central bank’s focus on ensuring that rate cuts are not just symbolic but are accompanied by tangible liquidity support.
The MPC also shifted its stance ‘accommodative’ to ‘neutral’ with the next moves from MPC remaining unpredictable. Inflation is now projected at 3.7 per cent for FY26 – while real GDP growth is forecast at 6.5.
Bottom line
In sum, while the repo cut may please borrowers and headlines, it’s the CRR cut that has truly pleased bankers.
By easing the liquidity constraint in a market where deposits are difficult to come by, the CRR move gives banks breathing room to lend, manage costs, and stay competitive – especially in segments where lending rates are benchmarked to the repo.
“The RBI gave with both hands this time,” said one banker, “but it’s the CRR hand that really helped.”
