RBI cuts CRR to ease liquidity, lowers GDP growth projection

New Delhi: The Reserve Bank of India (RBI) on Friday decided to lower cash reserve ratio (CRR) by 50 basis points that would ease liquidity by freeing up Rs 1.16 lakh crore in the banking system but kept the key policy interest rates unchanged for the 11^th time in row reaffirming commitment to price stability amidst inflationary pressure on slowdown in economic growth.

The CRR will be reduced from 4.5 per cent to 4 per cent. It will be cut in two tranches of 25 basis points each with effect from the fortnight beginning December 14. The CRR is the percentage of total deposits, which a commercial bank is required to hold as reserves either in cash or as deposits with the central bank.

Once the CRR is lowered banks will have more free money to lend. According to RBI Governor Shaktikanta Das said the 50 basis points cut in CRR would release primary liquidity of about Rs 1.16 lakh crore to the banking system.

This will be the first reduction in CRR since March 2020, when it was lowered to boost liquidity in the economy in view of the impact of the Covid pandemic.

“To ease the potential liquidity stress, it has now been decided to reduce the cash reserve ratio (CRR) of all banks to 4 per cent of net demand and time liabilities (NDTL) in two equal tranches of 25 bps each with effect from the fortnight beginning December 14, 2024 and December 28, 2024,” Das said.

“This will restore the CRR to 4 per cent of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022,” he added.

Industry bodies welcomed the central bank’s move to ease liquidity. “While the Reserve Bank of India’s stance on the repo rate was widely expected, we welcome the 50-bps cut in the CRR rate. This move is well-timed and practical and should help ease out the liquidity situation supporting credit and overall growth,” said Harsha Vardhan Agarwal, President, FICCI.

The RBI Monetary Policy Committee chaired by Governor Das decided to keep the policy repo rate unchanged at 6.5 per cent. The six member panel decided to maintain the status quo on policy interest rates by a 4 to 2 majority. The repo rate (repurchase rate), or the interest charged by the central bank on money lent to commercial banks, remains unchanged for the past 22 months. It was last changed in February 2023.

Consequently, the standing deposit facility (SDF) rate remains at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

The MPC also decided unanimously to continue with the ‘neutral’ stance and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth, Das announced after the three-day MPC meeting.

In October, the RBI had decided to change its stance from 'withdrawal of accommodation' to 'neutral'. All the six members of the MPC voted to continue with the ‘neutral’ stance.

Following the sharp slowdown in the July-September quarter numbers, the RBI has decided to lower its GDP growth projection for the current financial year to 6.6 per cent from its earlier forecast of 7.2 per cent.

As per the official data released last week, India’s gross domestic product (GDP) growth dipped to a seven quarter low of 5.4 per cent in July-September period.

In April-June 2024 period the Indian economy posted a growth of 6.7 per cent. The RBI has pegged Q3 growth at 6.8 per cent and Q4 at 7.2 per cent. This will take the full year average to 6.6 per cent. The RBI has also given projections for the first two quarters of 2025-26. In the Q1 of 2025-26 the GDP is projected to grow at 6.9 per cent and in Q2 at 7.3 per cent.

The RBI has also decided to revise inflation projection upward due to the recent spike in the inflationary pressure. The headline inflation forecast for the financial year 2024-25 has been raised to 4.8 per cent, up from the previous estimate of 4.5 per cent.

Addressing a media briefing, Das reaffirmed the central bank’s unwavering commitment to price stability.

Making an analogy of price rise and horse, the governor said, "The inflation horse made a very valiant effort to bolt, but our effort is to keep it on a tight leash.”

“While liquidity remains tight, given the focus on inflation control, this measure may prolong the process of bringing inflation under control unless the fresh agriculture crop arrivals result in a sharp fall in prices or growth continues to remain sluggish. Equity markets got what they wanted and hence have taken the policy outcome in their stride,” said Dhiraj Relli, MD & CEO, HDFC Securities.

“Near-term moves in the markets could remain dependent on foreign flows till the time the Indian macros and micros show sustained improvement,” Relli added.