The Reserve Bank of India (RBI) Governor Shaktikanta Das announced a significant 50 basis points (bps) cut in the Cash Reserve Ratio (CRR), reducing it to 4% from 4.5% in today’s Monetary Policy Statement. This move is set to inject approximately Rs 1.16 lakh crore of additional liquidity into the banking system, aiming to address tight liquidity conditions and support economic growth.
Key Policy Decisions:
- Repo Rate: Unchanged at 6.5%
- SDF Rate: Held at 6.25%
- MSF and Bank Rate: Maintained at 6.75%
- CRR: Reduced by 50 bps to 4%, releasing Rs 1.16 lakh crore into the market.
Boost to Liquidity and Growth
The CRR cut, a significant liquidity-boosting measure, is expected to ease funding constraints faced by banks and stimulate credit growth. This decision aligns with the central bank’s dual objective of supporting growth while managing inflationary pressures.
Governor Shaktikanta Das highlighted that the slowdown in economic activity appears to have bottomed out in Q2 FY25, offering optimism for a recovery in the coming quarters. However, challenges such as tight liquidity conditions and elevated inflation warranted decisive measures.
What is CRR and Its Impact?
The Cash Reserve Ratio (CRR) is the percentage of a bank’s total deposits that it must maintain in reserves with the RBI. This tool helps manage liquidity and inflation:
- During Tight Liquidity: A CRR cut increases the funds available with banks for lending, stimulating economic activity.
- Inflation Control: Higher CRR reduces liquidity, curbing excessive lending and inflationary pressures.
With the current reduction, banks will have Rs 1.16 lakh crore in additional funds to deploy, fostering credit availability and economic growth.
Economic Context
The announcement comes against the backdrop of a challenging economic environment:
- GDP Growth: Slowed to a seven-quarter low of 5.4% in Q2 FY25.
- Inflation: Persisting at elevated levels.
- Geopolitical Tensions: Testing the resilience of central banks globally.
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