CRR at 3% seen as new normal, RBI says it's sufficient for liquidity

The cut in CRR would release primary liquidity of about Rs 2.5 lakh crore to the banking system by December 2025

The Reserve Bank of India (RBI) has decided to cut the cash reserve ratio (CRR) requirement of banks by 100 basis points (bps) to 3 per cent of net demand and time liabilities (NDTL) and this could be the new normal.  

 

It will be done in a staggered manner — with effect from the fortnights beginning September 6, October 4, November 1 and November 29.

 

The cut in CRR is set to release primary liquidity of about Rs 2.5 trillion into the banking system by December 2025.

 

Historically, CRR — the amount of cash that banks need to keep with the central bank for which they earn no interest — was maintained at 4 per cent during normal times.

 

During Covid, CRR was reduced to 3 per cent. The thinking is that 3 per cent CRR could be the new normal.

 

“It will not only improve liquidity, but also help reduce cost of funding for the banks,” RBI governor Sanjay Malhotra said while explaining the rationale behind the reduction.

 

“Over the last 12-13 years, the CRR has mostly remained at 4 per cent. During Covid, we reduced it by 1 per cent. Now, these reserves are basically kept for liquidity management. So, the experience as of now does not suggest that perhaps we do not need 4 per cent, 3 per cent can perhaps suffice,” said Malhotra at the post policy press conference. 

 

“We do not know what the future holds. As of now, it seems that 3 per cent is a comfortable reserve ratio to have from a liquidity management perspective,” he said.

 

The CRR cut will also aid in monetary transmission, Malhotra said.

 

He reiterated that RBI will continue to monitor the evolving liquidity and financial market conditions and proactively take further measures, as warranted. The release of liquidity to the banks due to CRR cut can now be deployed in revenue earning assets, which in turn will help banks improve margins.

 

The cumulative 100 bps policy repo rate cut will put pressure on net interest margins (NIMs) of banks as loan re-pricing will happen faster than deposits.

 

According to RBI’s estimate, bank margins will improve by 7 bps.

 

“Apart from providing liquidity, it will also reduce their costs and improve NIMs by about 7 bps at least is our estimate. We provide liquidity so that there is a better transmission, there is a faster transmission and it is primarily basically for that,” he added.

 

“The assessment has clearly changed. Before Covid, the CRR had never dipped below 4 per cent — not in recent history, apart from possibly in the 1960s. That’s why no one expected a CRR cut; 4 per cent was seen as the norm in non-crisis periods. Now, maintaining CRR at 3 per cent suggests a shift in RBI’s view on what’s adequate in normal times, that is, non-crisis times,” said Gaura Sen Gupta, chief economist, IDFC FIRST Bank.

 

“This also implies something else: the RBI could have relied on open market operations (OMOs) to infuse liquidity, but chose a CRR cut instead. That decision acknowledges the need for durable liquidity infusion — especially considering margins of banks. It appears the RBI is trying to make liquidity access easier for banks while managing the margins,” she added.

 

The RBI last cut the CRR by 50 bps to 4 per cent in its December 2024 monetary policy announcement. This had released primary liquidity of Rs 1.16 trillion in the banking system.