RBI gives Banks ₹1.16 lakh cr liquidity injection via 50 bps CRR cut
The Reserve Bank of India (RBI) has given Banks a ₹1.16 lakh crore liquidity injection by announcing a 50 basis points cut in the cash reserve ratio from 4.5 per cent of their deposits to 4 per cent.
The two-tranche CRR cut of 25 basis points each, which is with effect from the fortnight beginning December 14, 2024, and December 28, 2024, is aimed at alleviating the liquidity tightness Banks may experience from mid-December onwards due to GST and advance tax outflows.
CRR is the cash parked by Banks in their specified current account with RBI. The central bank does not pay any interest on the CRR balances maintained by banks.
RBI Governor Shaktikanta Das said, “Even as liquidity in the banking system remains adequate, systemic liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows. To ease the potential liquidity stress, it has now been decided to reduce the cash reserve ratio (CRR) of all banks…”
He emphasised that this will restore the CRR to 4 per cent of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022.
V Rama Chandra Reddy, Head-Treasury, Karur Vysya Bank, observed that the impact of the 50 basis points CRR cut will be fully realized by banks starting December 28, resulting in a liquidity infusion of ₹1.16 lakh crore.
“Banks can utilize this additional liquidity to replace existing borrowings, expand lending to enhance yields or explore investment opportunities, especially if they have a high Loan-to-Deposit Ratio (LDR).
“This CRR cut will boost overall system liquidity, likely causing a slight decline in money market rates. However, the primary financial advantage will go to banks, as they will begin earning interest on these newly available funds,” he said.
MV Rao, chairman of the Indian Banks’ Association & MD, Central Bank of India, saidthe freed-up liquidity will enable lenders to focus on 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.
CRISIL Chief Economist Dharmakirti Joshi and Senior Economist Pankhuri Tandon noted that the CRR cut in two tranches of 25 basis points in December, bringing it to 4 per cent this fiscal — on a par with pre-pandemic rates. These cuts will swiftly boost systemic liquidity — which is seeing signs of pressure — and keep financial conditions conducive for growth, they added.