The Reserve Bank of India (RBI) recently announced a 50 basis points cut in the Cash Reserve Ratio (CRR) to 4% during the Monetary Policy Committee (MPC) meeting. This decision is expected to infuse ₹1.16 lakh crore into the banking system, playing a crucial role in boosting liquidity and facilitating economic growth in the country. The move will be executed in two installments of 25 basis points each, with the first tranche slated to begin on December 14.
RBI Governor Shaktikanta Das highlighted the objective of this reduction, emphasizing that the primary goal is to alleviate liquidity constraints within the banking sector without triggering inflationary pressures. By providing durable liquidity through this cut, banks will have the necessary resources to increase lending and thereby stimulate growth in various sectors of the economy. However, despite the CRR reduction, the central bank opted to maintain the repo rate at 6.5%, citing concerns about inflation risks and uncertainties surrounding the growth trajectory.
The Monetary Policy Committee voted 4:2 to retain the neutral stance previously adopted in October, underscoring a cautious approach in light of persisting high food inflation levels and ongoing global economic volatility. The CRR reduction aligns with the RBI's broader efforts to stabilize the rupee by offsetting some of the liquidity challenges stemming from significant interventions in the forex market. This strategic adjustment is aimed at maintaining stability within the financial system while also facilitating a conducive environment for economic activities to thrive.
Economists are viewing the CRR cut as a favorable step towards fostering growth, as it is anticipated to free up additional funds for banks, ultimately spurring lending activities and providing vital support to businesses. RBI Governor Das acknowledged the recent deceleration in growth momentum but expressed optimism concerning the potential resurgence in capital expenditure and the favorable impact of forthcoming monsoon seasons. Lastly, the RBI remains committed to actively managing liquidity operations, with a focus on effectively balancing concerns related to inflation and growth, as mentioned by Governor Das.