The Reserve Bank of India (RBI) on December 6 slashed the cash reserve ratio (CRR) for banks by 0.5 per cent to make more funds available for lending to spur economic growth, but kept the key policy repo rate unchanged at 6.5 per cent with an eye on inflation. The CRR has been reduced from 4.5 per cent to 4 per cent. This is the first time since March 2020 that the CRR has been cut. The CRR is the proportion of deposits that banks have to set aside as idle cash in the system. The CRR cut will infuse Rs 1.16 lakh crore into the banking system and bring down market interest rates. The decision had been taken by the RBI monetary policy committee with a 4:2 majority after a detailed assessment of the macroeconomic outlook.
The MPC’s decision to keep the repo rate unchanged was along expected lines, with the CPI inflation exceeding the MPC’s upper threshold of 6.0 per cent. By maintaining the repo rate unchanged for the 11th consecutive time, the RBI’s decision reflects a prudent approach to monetary policy with durable disinflation being the primary mandate. However, the cut in the CRR by 50 bps would help support growth, after the downward revision in the forecast for FY2025. The CRR cut aims to inject additional liquidity into the banking system, enabling banks to lower lending rates and increase credit availability, particularly for sectors struggling with subdued demand.
The CRR reduction will likely benefit rate-sensitive sectors such as real estate, automobiles, and consumer durables by lowering borrowing costs and enhancing liquidity. This move reflects the central bank’s nuanced approach to addressing India’s economic challenges, balancing the need to stimulate growth while managing persistent inflationary pressures. However, the RBI remains cautious about creating excess liquidity, which could lead to asset bubbles or speculative activity in overvalued markets. The policy decision signals the RBI’s intent to adopt a calibrated approach, using liquidity measures to support growth while maintaining vigilance over inflation and fiscal discipline.
The RBI has also scaled down its forecast for India’s GDP growth for 2024-25 to 6.6 per cent from 7.2 per cent earlier. The decision had been made as the growth in real GDP in the second quarter of this year at 5.4 per cent turned out to be much lower than anticipated. The decline in growth was led by a substantial deceleration in industrial growth from 7.4 per cent in the first quarter to 2.1 per cent in the second quarter due to the subdued performance of manufacturing companies, contraction in mining activity and lower electricity demand. During its October 2024 monetary policy meeting, the RBI had forecast India’s GDP to grow at 7.2 per cent in FY25, higher than 6.5-7 per cent projected in the Finance Ministry’s Economic Survey.
