MUMBAI: The Reserve Bank of India (RBI) that elected to retain the repo rate at 6.5 per cent has in its latest Monetary Policy Committee (MPC) meeting, prioritised liquidity enhancement.
By slashing the cash reserve ratio (CRR) by 50 basis points to 4 per cent from 4.5 per cent, the central bank aims to release Rs1.16 lakh crore into the banking system even as the banks are struggling with lagging deposit growth compared with robust credit expansion.
This move provides a significant cushion for lenders, enhancing their capacity to lend without relying entirely on accelerating deposit mobilisation.
How CRR cut helps banks
Banks have been grappling with tight liquidity conditions exacerbated by seasonal factors like advance tax outflows, GST payments, and heightened credit demand during the festive season.
The CRR cut reduces the proportion of funds banks must park with the RBI as a reserve, directly freeing up resources to support lending and operational needs.
Notably, the surplus liquidity will alleviate immediate pressure on banks to aggressively raise deposits, which has been a challenge as deposit growth continues to trail behind credit growth. This measure could also dampen the upward pressure on deposit rates, providing some relief to banks’ cost structures.
Lending boost
The released funds are expected to spur lending, stimulating economic activity amid global and domestic headwinds. Analysts view this step as a net interest margin (NIM) accretive measure for banks, improving profitability while enabling them to pass on benefits to borrowers.
The potential for increased credit availability aligns with the RBI’s efforts to balance growth and inflationary pressures.
Repo rate steady
While providing liquidity support through the CRR cut, the RBI has maintained the Repo rate at 6.5 per cent for the 11th consecutive time. This decision was reached via a 4-2 majority vote, reflecting differences within the MPC on managing growth versus inflation.
The unchanged Repo rate ensures external benchmark-linked lending rates (EBLRs) remain steady, providing relief to borrowers by avoiding hikes in equated monthly installments (EMIs).
However, persistent food inflation and elevated consumer price index (CPI) levels have kept the central bank cautious. Retail inflation surged to a 14-month high of 6.21 per cent in October, above the RBI’s tolerance band, compelling the policy stance to remain “neutral.”
Inflation forecasts
The MPC also revised its economic projections, lowering the GDP growth forecast for FY25 to 6.6 per cent from 7.2 per cent, citing a slowdown observed in Q2. Conversely, the inflation estimate was raised to 4.8 per cent, highlighting sustained price pressures. Governor Shaktikanta Das emphasised the importance of durable price stability as a foundation for sustainable growth.
Implications for borrowers
The CRR cut’s impact on deposit and lending rates will be keenly observed. While the immediate effect may lead to a marginal reduction in deposit rates due to enhanced liquidity, it could also result in a slower pace of lending rate hikes under the marginal cost of fund-based lending rate (MCLR) system.
Borrowers tied to Repo-linked loans, however, benefit directly from the unchanged policy rate. In the broader context, this policy adjustment seeks to balance liquidity needs with inflation control, setting the stage for sustained economic recovery.
