New Delhi, Dec 6: The RBI’s decision to cut the cash reserve ratio (CRR) by 50 bps would help support growth, after the revision in the GDP forecast for FY25, industry experts said on Friday. The Central Bank’s monetary policy committee (MPC) slashed the CRR for banks by 0.5 per cent to make more funds available for lending to spur economic growth. The CRR is the proportion of deposits that banks have to set aside as idle cash in the system.
“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. However, the cut in the CRR by 50 bps would help support growth, after the downward revision in the forecast for FY2025,” said Aditi Nayar, Chief Economist at ICRA.
“If the CPI inflation retraces to below 5.0 per cent by the December 2024 print, the likelihood of a repo cut in February 2025 will rise sharply,” Nayar added. 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.
“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,” said Narinder Wadhwa, Managing Director of SKI Capital. The CRR reduction will likely benefit rate sensitive sectors such as real estate, automobiles, and consumer durables by lowering borrowing costs and enhancing liquidity.
However, the RBI remains cautious about creating excess liquidity, which could lead to asset bubbles or speculative activity in overvalued markets, said experts. 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.
According to Dr Samantak Das, Chief Economist and Head Research and REIS, India, JLL, the RBI’s decision to maintain the repo rate unchanged for the 11th consecutive time reflects a prudent approach to monetary policy with durable disinflation being the primary mandate. “Inflation is seasonal in nature and is expected to reduce in the next quarter suggesting potential for future rate cuts,” he said.
By maintaining the repo rate at 6.5 per cent and implementing a 50 bps CRR cut to 4 per cent, the central bank has infused Rs 1.16 lakh crore into the banking system. “The RBI’s December MPC decision reflects a delicate balancing act between addressing domestic liquidity challenges and managing external vulnerabilities,” said Arsh Mogre, Economist Institutional Equities, PL Capital Prabhudas Lilladher.
