CASH RESERVE RATIO: ECONOMY

CASH RESERVE RATIO: ECONOMY

NEWS: Will RBI cut repo rate amid high inflation and sluggish growth? All eyes on CRR and GDP projections

 

WHAT’S IN THE NEWS?

The Cash Reserve Ratio (CRR) is the portion of banks' deposits that must be kept with the RBI, currently set at 4.5%, to manage liquidity, inflation, and lending. A CRR cut, last seen in March 2020, could ease tight liquidity, boost lending, and support economic growth.

Cash Reserve Ratio (CRR):

  • Definition: CRR is the percentage of a bank’s total deposits that must be maintained as reserves with the Reserve Bank of India (RBI).
  • Current Rate: 4.5%
  • Purpose:
  • Manage liquidity in the banking system.
  • Control inflation.
  • Regulate lending.
  • No Interest: Banks do not earn interest on CRR reserves.

Why a CRR Cut is Expected?

  1. Tight Liquidity Conditions:
    • RBI's dollar sales to stabilize the rupee have reduced liquidity.
    • Advance tax, GST payments, and quarter-end credit demand are expected to strain liquidity further.
  1. Sluggish Economic Growth:
    • GDP growth in Q2 FY25 slowed to 5.4%, the lowest in seven quarters.
    • A CRR cut could inject funds into the economy, stimulating growth.
  1. Forex Reserves Depletion:
    • Forex reserves have declined by $45 billion due to interventions to curb rupee volatility.
    • The rupee has depreciated by 1% since October 2024 amid FPI outflows.

 

Impact of a CRR Cut

  1. Increased Bank Liquidity:
    • A 50 bps cut could release ₹1.1-1.2 lakh crore.
    • A 25 bps cut could release ₹55-60 crore.
  1. Boost to Lending and Growth:
    • Banks would have more funds to lend, enhancing investments and consumption.
    • Borrowers could benefit from lower lending rates.
  1. Improved Bank Margins:
    • A CRR cut is Net Interest Margin (NIM) accretive, potentially improving banks' profitability.
  1. Support for Currency Stabilization:
    • Eases liquidity and complements RBI efforts to stabilize the rupee without lowering the repo rate.

Previous CRR Cut

  • The last CRR cut occurred in March 2020, during the COVID-19 pandemic, reducing it to 3%.
  • Since then, the CRR has been increased thrice, most recently to 4.5% in May 2022.

Source : https://economictimes.indiatimes.com/news/newsblogs/rbi-monetary-policy-meeting-2024-live-updates-today-repo-rate-6-december-mpc-meet-time-gdp-cpi-inflation-data-reserve-bank-of-india-governor-shaktikanta-das-speech/liveblog/116025095.cms?from=mdr