CRR cut could reduce lenders’ cost of funds, say senior bankers
The Reserve Bank of India’s move to reduce the cash reserve ratio (CRR) requirement of all banks by 50 basis points (bps) to 4 per cent of their deposit base will release primary liquidity of about ₹1.16 lakh crore in the banking system, easing pressure on lenders’ cost of funds, senior bankers say.
MV Rao, Chairman of Indian Banks’ Association & MD, Central Bank of India, saidthe freed-up liquidity will enable lenders to focus on lending to the productive sectors.
“A 50 basis point cut in CRR from 4.5 to 4 per cent in two phases is a welcome measure announced by the RBI today. It is expected to infuse ₹1.16 lakh crore into the system and banks will have additional resources for lending to the productive sectors. This will also result in lower cost of funds for the banks. Though RBI has not adopted direct measure of reducing repo rate, infusion of liquidity through CRR cut would help to keep the interest rates benign,” he said.
CS Setty, Chairman, SBI, said: “The monetary policy announcements made today are pragmatic, candid and has crossed important milestones in regulatory and development policy space. The cut in CRR by 50 bps, raising the FCNR (B) deposit rates, development of the Secured Overnight Rupee Rate (SORR) benchmark and revision in limit of collateralised agriculture loans are all positive for banks. The decision to form a committee to investigate the issue of ethical AI in financial services and use of technology to detect mule accounts is timely”.
Mandar Pitale, head of treasury at SBM Bank India, says increase in banking system liquidity by over ₹1 lakh crore in the next 3 weeks will cool off the money market rates and lead to marginal reduction in term deposit rates as we move towards calendar year 2025.
According to Manappuram Finance MD, CEO V. P. Nandakumar, the RBI has effectively signalled a pivot to policy easing by cutting the CRR by 50 bps. This is not only positive for the banking sector as their profits on mark-to-market portfolio will improve significantly, it will also support the broader economy by ensuring adequate system liquidity which will see money market interest rates evolving in an orderly fashion.
However, few analysts also question if lenders will use the incremental capital towards credit growth, as they also have to build higher quality liquid asset to comply with proposed liquidity coverage ratio draft guidelines.
Zarin Daruwala, CEO, India and South Asia, Standard Chartered Bank, said, “The MPC’s decision to hold repo rate in the face of slower growth, shows its focus on reining in inflation. It also validates that the MPC is confident that economic growth will revive in the coming months on the back of government spending and improved industrial activity. The revised CPI and GDP forecast of 4.8 per cent and 6.6 per cent, respectively, seem achievable. The CRR cut is a welcome move and will help address part of the recent reduction in system liquidity.