Mumbai: The Reserve Bank Friday decided to cut Cash Reserve Ratio (CRR) by a huge 1 per cent, which will unlock Rs 2.5 lakh crore liquidity to the banking system for lending to productive sectors of the economy.
With the reduction in four equal tranches ending November 29, 2025, the CRR would come down to 3 per cent. This means that the commercial banks would have to maintain a lower level of 3 per cent in liquid cash form with the RBI allowing them to have higher funds for lending.
The last massive similar CRR cut of 1 per cent was done in March 27, 2020 when the RBI had also slashed benchmark repo rate by 75 basis points in an off-policy decision to support amid onslaught of Covid-19 pandemic.
“The Reserve Bank remains committed to provide sufficient liquidity to the banking system. To further provide durable liquidity, it has been decided to reduce the cash reserve ratio (CRR) by 100 basis points (bps) to 3 per cent of net demand and time liabilities (NDTL) in a staggered manner during the course of the year,” RBI Governor Sanjay Malhotra said, while announcing the bi-monthly MPC outcome.
This reduction will be carried out in four equal tranches of 25 bps each with effect from the fortnights beginning September 6, October 4, November 1 and November 29, 2025, he said.
“The cut in CRR would release primary liquidity of about Rs 2.5 lakh crore to the banking system by December 2025. Besides providing durable liquidity, it will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market,” he said.
Higher credit flow will help in boosting economic growth which hit a four-year low of 6.5 per cent in FY’25.
“I would like to reiterate that we will continue to monitor the evolving liquidity and financial market conditions and proactively take further measures, as warranted,” he said.
RBI had last slashed CRR by 50 basis points to 4 per cent in the December 2024 MPC announcement. It was done in two equal tranches of 25 basis points, each with effect from the fortnight beginning December 14, 2024 and December 28, 2024.
The move led to the unlocking of Rs 1.16 lakh crore to the banking system and easing the liquidity situation.
The RBI May 4, 2022 had raised CRR to 4.5 per cent from 4 per cent in an off-cycle Monetary Policy Committee (MPC) meeting, with effect from May 21 the same year.
RBI, however, did not tinker with Statutory Liquidity Ratio (SLR) and maintained it at 18 per cent.
SLR is a regulatory requirement that requires banks to hold 18 per cent of total deposits or net demand and time liabilities (NDTL) in government securities. This ensures that banks have sufficient liquidity to meet customer withdrawal demands and maintain financial stability.
On the liquidity situation, Malhotra said, a total amount of Rs 9.5 lakh crore of durable funds has been injected into the banking system since January.
As a result, after remaining in deficit since mid-December, liquidity conditions transitioned to surplus at the end of March.
This is also evident from the tepid response to daily Variable Repo Rate (VRR) auctions and high Standing Deposit Facility (SDF) balances – the average daily balance during April-May amounted to Rs 2 lakh crore.
Reflecting the improvement in liquidity conditions, the weighted average call rate (WACR) – the operating target of monetary policy – traded at the lower end of the LAF corridor since the last policy, he said.
The comfortable liquidity surplus in the banking system has further reinforced transmission of policy repo rate cuts to short term rates, he said.
“However, we are yet to see a perceptible transmission in the credit market segment, though we must keep in mind that it happens with some lag,” he said.
PTI
